I suspect this due to selinux blocking xm in some circumstances. Does the same thing happen if you run setenforce 0 beforehand?

You were right, there is no issue when selinux is disabled. Here's the details of the violation if selinux is enabled:

SELinux is preventing /usr/bin/python from append access on the file tmpzy3mkl-xend.log.

*****  Plugin catchall (100. confidence) suggests  ***************************

If you believe that python should be allowed append access on the tmpzy3mkl-xend.log file by default.
Then you should report this as a bug.
You can generate a local policy module to allow this access.
Do
allow this access for now by executing:
# grep xm /var/log/audit/audit.log | audit2allow -M mypol
# semodule -i mypol.pp

Additional Information:
Source Context                unconfined_u:system_r:virsh_t:s0
Target Context                unconfined_u:object_r:tmp_t:s0
Target Objects                tmpzy3mkl-xend.log [ file ]
Source                        xm
Source Path                   /usr/bin/python
Port                          <Unknown>
Host                          igo
Source RPM Packages           python-2.7.1-7.fc15
Target RPM Packages           
Policy RPM                    selinux-policy-3.9.16-38.fc15
Selinux Enabled               True
Policy Type                   targeted
Enforcing Mode                Permissive
Host Name                     igo
Platform                      Linux igo 2.6.40.4-5.fc15.x86_64 #1 SMP Tue Aug 30
                              14:38:32 UTC 2011 x86_64 x86_64
Alert Count                   1
First Seen                    Tue 27 Sep 2011 05:15:44 PM EDT
Last Seen                     Tue 27 Sep 2011 05:15:44 PM EDT
Local ID                      8db220c1-d5e9-414f-9adb-3db21a3e94f5

Raw Audit Messages
type=AVC msg=audit(1317158144.473:539): avc:  denied  { append } for  pid=18326 comm="xm" name="tmpzy3mkl-xend.log" dev=sda1 ino=51302 scontext=unconfined_u:system_r:virsh_t:s0 tcontext=unconfined_u:object_r:tmp_t:s0 tclass=file


type=SYSCALL msg=audit(1317158144.473:539): arch=x86_64 syscall=open success=yes exit=ENXIO a0=2b3b560 a1=441 a2=1b6 a3=9 items=0 ppid=18325 pid=18326 auid=500 uid=500 gid=500 euid=500 suid=500 fsuid=500 egid=500 sgid=500 fsgid=500 tty=pts1 ses=1 comm=xm exe=/usr/bin/python subj=unconfined_u:system_r:virsh_t:s0 key=(null)

Hash: xm,virsh_t,tmp_t,file,append

audit2allow

#============= virsh_t ==============
allow virsh_t tmp_t:file append;

audit2allow -R

#============= virsh_t ==============
allow virsh_t tmp_t:file append;

Package: xen-4.1.2-1.fc16
Architecture: x86_64
OS Release: Fedora release 16 (Verne)

Comment
-----
No reason

*** Bug 770631 has been marked as a duplicate of this bug. ***

Reassigning to selinux.

How is "tmpzy3mkl-xend.log" file created? 

And why is located in /tmp rather than in the /var/log/xen directory?

It is a fall back location if the regular log file can't be opened - the python code from XendLogging.py is

    try:
        fileHandler = openFileHandler(filename)
        logfilename = filename
    except IOError:
        logfilename = tempfile.mkstemp("-xend.log")[1]
        fileHandler = openFileHandler(logfilename)

This probably means xend is run as non-root and is unlikely to do anything useful. Xend is being deprecated anyway so perhaps it makes sense just to catch the backtrace and return an ordinary error if selinux stops the file being created.

Looks to me like this file got created when the system was in permissive mode. tmp_t is not a label that we should see,if a domain was allowed to create a file in /tmp.

The question is what labeled process created tmpzy3mkl-xend.log?

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