Then, what you are referring to as paragraphs in your example are lines. This may seem picky, but the distinction between lines and paragraphs makes sense. There is a paragraph mode reading files. See perlrun, there the switch -0 and the special value 00 for it.

blah blah blah     #line \
blah blah blah     #line - paragraph
blah blah blah     #line /
                         <--- paragraph separator
blah blah blah     #line \
blah blah blah     #line - paragraph
blah blah blah     #line /
[download]

I would do this:

#!/usr/bin/perl
$file = shift;
open(I,"<$file");
local $/;
$_ = <I>;
s|<list>(.*?)</list>|"<list>".join("\n",map{"<item>$_</item>"}
    split"\n",$1)."</list>"|ges;
print;
[download]

You can stuff that into a one-liner:

perl -p00 -e 's|<list>(.*?)</list>|"<list>".join("\n",map{"<item>$_</i
+tem>"}split"\n",$1)."</list>"|ges;' textfile
[download]

greets,
--shmem

_($_=" "x(1<<5)."?\n".q·/)Oo.  G°\        /
                              /\_¯/(q    /
----------------------------  \__(m.====·.(_("always off the crowd"))."·
");sub _{s./.($e="'Itrs `mnsgdq Gdbj O`qkdq")=~y/"-y/#-z/;$e.e && print}