I don't know what it is about xine, but it's really strange and stubborn when it comes to file input, especially with ISOs. For example, it only accepts the full path, you can't just run 'xine dvd:./filenamename.iso'. I've struggled with the same problems you have, and I think it has something to do with the way the filename is parsed and passed to the program. But I think I've finally come up with a workaround.
After trying all kinds of combinations with %d and %f variables in the kde file associations, I finally decided to try a different tack. I created a simple shell script with the following lines:
Code:
#!/bin/bash
xine dvd:$1 &
exit 0
After making it executable, I went back to the kde associations and told it to open up xine with the shell script (/path/to/script.sh %f). And it works! xine will now play the iso from the file manager.
Hope this helps.
(by the way, the problem only seems to be with xine itself, gxine, for example, has no problem playing .iso files.)