Entities in XSL (again)

To all,
Sorry my first message got scrambled. 
I thought I had this working
but seem to have a problem in Oxygen 11 using Saxon 6.5 in that the nbsp
entity is not being recognized in the stylesheet. Works OK if defined in the
XML instance. What am I doing wrong?
The XML
<?xml version="1.0"
encoding="UTF-8"?>
 
The XSL<?xml version="1.0" encoding="utf-8"?>
 
Terry
<!DOCTYPE xsl:stylesheet [ <!ENTITY nbsp "&#160;"> ]>
<xsl:stylesheetxmlns:xsl="http://www.w3.org/1999/XSL/Transform"version="1.0">
<xsl:outputencoding="utf-8"indent="yes"method="html"/>
<xsl:templatematch="/">
<xsl:copy-ofselect="."/>
</xsl:template>
</xsl:stylesheet>
<wrapper>This is a
&nbsp; sample</wrapper>