The apparently XML derived “500 server error” problem with FCKEditor’s image upload tool and asp.net seems very common, and there seem to be half a million different confusing solutions on the web. In my case, it turned out the problem was paths and was fixed by adding a new key entry in web.config:
So nothing to do with XML at all really and the error was simply the result of an incorrect URL resulting in a 500 server error that returned invalid XML… A helpful error code could be added to FCKEditor, perhaps?