When output encoding in xml.sax.saxutils.XMLGenerator
is set to UTF-16, the result is a terrible mess. Namely:

- it does not encode the XML declaration at the very
top of the file (leaving it in single-byte Latin);

- it leaves closing '>' of each start tag unencoded
(that is, always outputs a single byte);

- it inserts a spurious byte order mark for each tag,
each attribute, each text node, and each processing
instruction.

A test illustrating the issue is attached. The issue is
applicable to both stable (2.4.3) and current (2.5)
versions of Python.

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Looking in xml/sax/saxutils.py, I see the problem in
XMLGenerator._write():
   - one-byte strings aren't recoded at all (sic!);
   - two-byte strings are converted using
unicode.encode(); this results in a BOM for each call of
_write() on Unicode strings.

The issue is easy to fix by using StreamWriter instead
of  a plain stream as the output sink. I am going to
submit a patch shortly.

Regards,
Nikolai Grigoriev 

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FYI: I posted a patch (#1470548) that fixes the issue. 

Regards,
Nikolai Grigoriev

Patch on issue 1470548.