I usually isolate external dependencies like reading a config file in their own facade-class with very little functionality. In tests I can create a mock version of this class that implements and use that instead of the real config file. You can create your own mockup’s or use a framework like moq or rhino mocks for this.
That way you can easily try out your code with different configuration values without writing complex tests that first write xml-configuration files. The code that reads the configuration is usually so simple that it needs very little testing.