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 / 

##</code><code>##

#!/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;

##</code><code>##

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