What you can pass as a param value depends on the processor.
You could certainly pass this as a string, but that's not very helpful. It would be better to pass it as a parsed XML document. I think most processors will probably allow you to pass the root node of a DOM or similar tree as a stylesheet parameter, and then to use XPath expressions to navigate that tree. But you need to check the details for you particular product.
Author, XSLT Programmer's Reference and XPath 2.0 Programmer's Reference