2.2.6 [W3C-XSLT] Section 7.1.2, Creating Elements with xsl : element
The name attribute is interpreted as an attribute value template. It is an error if the string that results from instantiating the attribute value template is not a QName. An XSLT processor may signal the error; if it does not signal the error, then it must recover by making the result of instantiating the xsl:element element be the sequence of nodes created by instantiating the content of the xsl:element element, excluding any initial attribute nodes.
MSXML3 and MSXML6
An error is signaled when the string that results from instantiating the attribute value template is not a QName.