This applies to test case fn-function-lookup-494 as well.

The relevant rules are in F+O section 18.2. To quote:

The supplied string is mapped to a typed value of the target type as defined in [XML Schema Part 2: Datatypes Second Edition]. Whitespace normalization is applied as indicated by the whiteSpace facet for the datatype. The resulting whitespace-normalized string must be a valid lexical form for the datatype. The semantics of casting follow the rules of XML Schema validation.

I think you have overlooked the rule about whitespace normalization. The whitespace facet for xs:normalizedString is "replace". This means that the first thing casting does is x09, x0A, and x0C by x20; after this replacement the value is within the lexical space of xs:normalizedSpace and casting therefore succeeds.

The rules in 18.2 take precedence over those in 18.3.3 by virtue of the fifth paragraph of section 18 which states: "When casting from xs:string or xs:untypedAtomic the semantics in 18.2 Casting from xs:string and xs:untypedAtomic apply, regardless of target type."

I am therefore closing this as invalid.

Thanks for the clarification.