try this charset=ISO-8859-1
I tried encoding=ISO-8859-1 in the xml tag and it didn't make a difference.Also tried LATIN-1 - parsing error. Using charset in the xml tag also gave a parsing error.
Can you send the exact error language, what it is showing on screen.?
I changed my locale to french and input language to french to add a few french characters in an XML with encoding ISO-8859-1 and it works properly.
Numerical code instead of friendly code seems to do the trick.