There are two ways to handle this, but for both you need to make changes to the input file.
1) Change your to   in you input files. It is always better to use Unicode and avoid readable entities in XML documents. Use plain Unicode characters or their numerical form.
2) If you still need/want to use
You can declare a custom doctype in the file that will do the conversion for you:
<!DOCTYPE doctypeName [
<!ENTITY nbsp " ">
]>
This problem is coming because isn’t one of XMLs predefined entities.