How about
<xsl:stylesheet version="1.0" xmlns:xsl="http://www.w3.org/1999/XSL/Transform">
<xsl:output indent="yes"/>
<xsl:key name="kGroupLeader" match="*" use="
generate-id(self::*[name() != name(preceding-sibling::*[1])])
" />
<xsl:template match="foo">
<xsl:copy>
<s>
<xsl:for-each select="*[key('kGroupLeader', generate-id())]">
<s>
<xsl:copy-of select=". | following-sibling::*[
name() = name(current())
and
generate-id(current()) = generate-id(
preceding-sibling::*[key('kGroupLeader', generate-id())][1]
)
]" />
</s>
</xsl:for-each>
</s>
</xsl:copy>
</xsl:template>
</xsl:stylesheet>
With your input of
<foo>
<bar id="1">bar</bar>
<bar id="2">bar</bar>
<foobar id="3"><baz>baz</baz></foobar>
<foobar id="4">foobar</foobar>
<bar id="5">bar</bar>
<bar id="6">bar</bar>
</foo>
this produces
<foo>
<s>
<s>
<bar id="1">bar</bar>
<bar id="2">bar</bar>
</s>
<s>
<foobar id="3">
<baz>baz</baz>
</foobar>
<foobar id="4">foobar</foobar>
</s>
<s>
<bar id="5">bar</bar>
<bar id="6">bar</bar>
</s>
</s>
</foo>