> <!DOCTYPE root [
> <!ENTITY f SYSTEM "f.xml">
> ]>
> <root>
> <a>ab'cd</a>
> <a>text</a>
> </root>

This is a different issue, I think the problem is that
sgml-syntax-propertize-inside doesn't handle nesting in the DTD
definition <! [ <! ... > ]>.  The patch below just avoids calling
sgml-syntax-propertize-inside on the prolog in nxml-mode (but the
problem remains in sgml-mode).  Though you'll hit Bug#18871/23668 if you
try to edit the DTD.