If you change the <p> element to a <span> element, you will see that Saxon doesn't add extra space between word20 and the end of the <span> element. But an extra space at the end of a <p> element is I believe OK - it's not visible in the browser and therefore Saxon is allowed to generate it (under the rules of the HTML output method).
Incidentally, this has nothing to do with the fact that Saxon has wrapped the lines, you get exactly the same output if the text was already in multi-line form. For block-level tags like <p>, Saxon tries to align the tags horizontally if the output is on a single line, or vertically if not.
Michael Kay
-----Original Message-----
From: saxon-help-admin@lists.sourceforge.net [mailto:saxon-help-admin@lists.sourceforge.net] On Behalf Of apavlenko
Sent: 08 September 2003 12:28
To: saxon-help@lists.sourceforge.net
Subject: [saxon] Correct whitespace addition when serializing with indentation

It should but it doesn't!
See attached evidences.
----- Original Message -----
From: Michael Kay
To: 'Alexander Pavlenko'
Sent: Sunday, September 07, 2003 11:51 PM
Subject: RE: Saxon questions

The correct place for saxon questions is the saxon-help list at sourceforge.net.
-----Original Message-----
From: Alexander Pavlenko [mailto:apavlenko@mail.ru]
Sent: 06 September 2003 19:17
To: mhk219@mhk.me.uk
Subject: Saxon questions

Hello Michael,
I've consulted in fido7.ru.xml newsgroup about some questions on Saxon and they weren't able to help me so I've decide to ask you.
My questions are the following:
1. When serializing with xhtml output method and indentation turned on Saxon wraps long strings (> 150 chrs) and puts closing tag (</p> for example) on a new line. If I understand correctly it means that subsequent parsing of the transformation result will add extra non-ignorable whitespace at the end of the text node that in one's turn may for  example distort the visual representation of such xhtml. Why Saxon does so? 
Saxon should only put a newline where there is already a space, which will not affect the appearance in the browser.