Do you think it's just a matter of the dolist on line 466 of xterm.el needing additional entries (I don't see one there for M-SPC)?
For example, I see there looks to be an entry for C-M-SPC:
(7 32 [?\C-\M-\s])
(3 32 [?\M-\s])
to handle the modifyOtherKeys encoding of "\E[27;3;32~" for M-SPC, but also that there are probably many many other sequences that aren't being handled.