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This seems to be fixed with newer version of libxdiff (which is used by xdiff extension).
According to library changelog:
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* Sun, Mar 26 2006 - Davide Libenzi
Fixed the missing end of line problem for text diff and patch.
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the xdiff functions require your initial string to end with a \n character.
When you use xdiff_string_diff, the initial string must either be zero-length or end with \n
eg. $patch= xdiff_string_diff($string,$string2);
if not, the patch will return an empty string.
xdiff_string_patch($string,$patch);
This will not normally affect xdiff_file_diff, but it's annoying nevertheless. To prevent this unexpected effect, I append a \n to the string before applying the initial diff, as follows.
if (!ereg("\n$",$string)) $string.="\n";
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