passing xml nodes/documents/fragments as parameters to xslt

(Posting a new answer, as the previous one did not solve the issue and this new one is radically different from the previous)

Seems to be a known issue with XALAN compiling processor ( XALANJ-2057, How can I pass a node as parameter to translets for XSLTC Processor).

So, what are the alternatives?

1. mess around with URIs as outlined in a response to How can I pass a node as parameter to translets for XSLTC Processor post
2. Instead of XALAN compiling processor (XSLTC), use XALAN interpretive processor. Or any other XSLT processor that supports such behavior.
3. Use DTMAxisIterator instead, also outlined in a response to How can I pass a node as parameter to translets for XSLTC Processor post - not sure if it will work, though.
4. Create a new DOM tree, combining your "parameter" DOM and the original XSLT input document

I found a solution (here: XSLT Processing with Java : passing xml content in parameter) which may work for your case as well:

String urls = "<urls><url id='google'>https://www.google.com</url>...";
trans.setParameter("lookupdoc", new StreamSource(new StringReader(urls)));

instead of creating a uriresolver from a string, just create a stream source from a string reader and pass it to the stylesheet.

After that, I was able to access the doc normally as XML:

<xsl:param name="lookupdoc"><urls/></xsl:param> 
... 
<xsl:variable name="googleurl" select="$lookupdoc/@id='google"/>

Did not test with xalan, but maybe the answer will help others who stumble onto this question :)