So from what I can see, the XML is produced by the DB Query plugin. Have you tried using a different query in that plugin? Is it possible that one of the fields being retrieved has binary content (like a BLOB field)? Can you post a sample record from that XML (but don’t post anything if the query contains sensitive data)?
You said in another thread that you had out-of-memory issues as well. I suspect that the XML file is perhaps too big to be handled. Workflow is a 32-bit app and so can only address up to 1.8 GB of memory or so. How big is the XML file that comes out of the Database Query task?