Generate xml from output clause

From MSDN

The OUTPUT clause is not supported in the following statements:
• DML statements that reference local partitioned views, distributed partitioned views, or remote tables.
• INSERT statements that contain an EXECUTE statement.
• Full-text predicates are not allowed in the OUTPUT clause when the database compatibility level is set to 100.
• The OUTPUT INTO clause cannot be used to insert into a view, or rowset function.
• A user-defined function cannot be created if it contains an OUTPUT INTO clause that has a table as its target.

You can't generate xml using output clause. So another alternative is declare an intermediary table variable to be the target then SELECT from that while insert or update table. something like this -

DECLARE @T TABLE (Id int, Name varchar(max))

INSERT @Test 
OUTPUT INSERTED.*
INTO @T
VALUES (1, 'One'), (2, 'Two'), (3, 'Three')

DELETE FROM @Test
OUTPUT DELETED.*
INTO @T

SELECT *
FROM  @T FOR XML RAW('data'), ELEMENTS XSINIL, TYPE

Try this:

DECLARE @Test TABLE (Id int, Name varchar(max))
DECLARE @Inserted TABLE (Id int, Name varchar(max))

INSERT @Test 
OUTPUT INSERTED.* INTO @Inserted
VALUES (1, 'One'), (2, 'Two'), (3, 'Three')

SELECT * From @Inserted FOR XML RAW('data'), ELEMENTS XSINIL, TYPE