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Under "default-collation" we say: The [xsl:]default-collation attribute does not affect the collation used by xsl:sort. We don't say one way or the other whether it affects the collation used by xsl:merge. I think we should be explicit that it does not (xsl:merge-key should behave like xsl:sort).
The WG agreed that default-collation does not affect xsl:merge-key. The change has been applied to the spec.