I ran into this error when trying to open an XSL file in Internet Explorer, which specified the encoding as ISO-8859-1. However, it seemed that one of the editors I used on Windows used a double-byte encoding to store the file.
While various editors and Firefox opened this file fine, IE gave the above error. One thing that worked for me was to open the file in XML Notepad 2007 and then save it. It seems that XML Notepad honors the encoding specified within the document while saving it.