Of course you can try to build a nested template but you need to know a maximal depth:

<TMPL_IF NAME="children">
<TMPL_LOOP NAME="children">
...
    <TMPL_IF NAME="children">
    <TMPL_LOOP NAME="children">
    (...)
    </TMPL_LOOP>
    </TMPL_IF>
...
</TMPL_LOOP>
</TMPL_IF>
[download]

I don't think that this is a good idea (or practise). I personally would try to use <TMPL_VAR NAME="tree_expanded"> and use an own recursive defined function to stringify the tree. :(