You were really close to it. I just modified your code the following way:

$begin = '[xyz]'; $end = '[/xyz]';
$string = '[xyz]level 1.1 [xyz]level 2.1[/xyz] rest of 1.1 [/xyz]';
1 while ($string =~ s@
                       \Q$begin\E
                       ((?:(?!=\Q$end\E).)*)
                       \Q$end\E
                     @
                       "<table><tr><td>$1</td></tr></table>"
                     @igex);
print $string;
[download]

Not terribly efficient, but it appers to do what you want.
Cheers,
CombatSquirrel.

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Entropy is the tendency of everything going to hell.