Currently the diff engine works in the following mode: it tries to match the common lines, and then there is an option to highlight the differences in characters (see https://sourceforge.net/tracker/index.php?func=detail&aid=861851&group_id=13216&atid=363216\).
Unfortunately, DisplayXMLFiles filter (https://sourceforge.net/tracker/index.php?func=detail&aid=1277319&group_id=13216&atid=363216) does not help in my case, as I want to merge documents still leaving the formatting untouched.
The example I attach is of course the difficult one: it is XML file, which was annotated. With real character comparison (which can e.g. optionally ignore the line breaks, whitespace etc) the comparison looks more fine-grained allowing the reviewer to concentrate really on what has changed.