Nested list from flat tree

hierarchy-from-flat.xsl

<xsl:stylesheet version="1.0" xmlns:xsl="http://www.w3.org/1999/XSL/Transform">
    <xsl:output method="xml" indent="yes"/>
    <xsl:strip-space elements="*"/>

    <xsl:template match="node() | @*">
        <xsl:copy>
            <xsl:apply-templates select="node() | @*"/>
        </xsl:copy>
    </xsl:template>

    <xsl:template match="list[not(preceding-sibling::*[1][self::list])]">
        <ol>
            <xsl:variable name="selfId" select="generate-id()"/>
            <xsl:call-template name="recurseItems"/>
            <xsl:apply-templates select="
                following-sibling::list
                [@level = 1 or not(@level)]
                [preceding-sibling::*[1][self::list]]
                [$selfId = generate-id(
                    preceding-sibling::list[not(preceding-sibling::*[1][self::list])][1]
                    )
                ]
                [not(position() = 1)]
                " mode="recurse"/>
        </ol>
    </xsl:template>

    <xsl:template name="recurseItems">
        <xsl:param name="nodes" select="."/>
        <xsl:variable name="nextStep" select="$nodes/following-sibling::*[1][self::list]"/>
        <xsl:choose>
            <xsl:when test="$nodes/@level and ($nodes/@level &lt; $nextStep/@level)">
                <li>
                    <xsl:value-of select="$nodes"/>
                    <ol>
                        <xsl:call-template name="recurseItems">
                            <xsl:with-param name="nodes" select="$nextStep"/>
                        </xsl:call-template>
                    </ol>
                </li>
            </xsl:when>
            <xsl:when test="$nodes/@level and ($nodes/@level > $nextStep/@level)">
                <xsl:apply-templates select="$nodes" mode="create"/>
            </xsl:when>
            <xsl:when test="$nextStep">
                <xsl:apply-templates select="$nodes" mode="create"/>
                <xsl:call-template name="recurseItems">
                    <xsl:with-param name="nodes" select="$nextStep"/>
                </xsl:call-template>
            </xsl:when>
            <xsl:when test="not($nextStep)">
                <xsl:apply-templates select="$nodes" mode="create"/>
            </xsl:when>
        </xsl:choose>
    </xsl:template>

    <xsl:template match="list" mode="recurse">
        <xsl:call-template name="recurseItems"/>
    </xsl:template>

    <xsl:template match="list" mode="create">
        <li>
            <xsl:value-of select="."/>
        </li>
    </xsl:template>

    <xsl:template match="list"/>
</xsl:stylesheet>

hierhierarchy-from-flat-Result.xml

<?xml version="1.0" encoding="UTF-8"?>
<root>
    <h1>text</h1>
    <ol>
        <li>1.1</li>
        <li>1.2
            <ol>
                <li>1.2.1</li>
                <li>1.2.2
                    <ol>
                        <li>1.2.2.1</li>
                    </ol>
                </li>
            </ol>
        </li>
        <li>1.3</li>
    </ol>
    <p>text</p>
    <ol>
        <li>2.1</li>
        <li>2.2</li>
    </ol>
    <h2>text</h2>
    <h1>text</h1>
    <ol>
        <li>3.1</li>
        <li>3.2
            <ol>
                <li>3.2.1</li>
                <li>3.2.2
                    <ol>
                        <li>3.2.2.1</li>
                    </ol>
                </li>
            </ol>
        </li>
        <li>3.3
            <ol>
                <li>3.3.1</li>
                <li>3.3.2</li>
            </ol>
        </li>
    </ol>
    <p>text</p>
</root>

hierhierarchy-from-flat-Source.xml

<root>
    <h1>text</h1>
    <list level="1">1.1</list>
    <list level="1">1.2</list>
    <list level="2">1.2.1</list>
    <list level="2">1.2.2</list>
    <list level="3">1.2.2.1</list>
    <list level="1">1.3</list>
    <p>text</p>
    <list>2.1</list>
    <list>2.2</list>
    <h2>text</h2>
    <h1>text</h1>
    <list level="1">3.1</list>
    <list level="1">3.2</list>
    <list level="2">3.2.1</list>
    <list level="2">3.2.2</list>
    <list level="3">3.2.2.1</list>
    <list level="1">3.3</list>
    <list level="2">3.3.1</list>
    <list level="2">3.3.2</list>
    <p>text</p>
</root>