Replace and overwrite instead of appending

You need seek to the beginning of the file before writing and then use file.truncate() if you want to do inplace replace:

import re

myfile = "path/test.xml"

with open(myfile, "r+") as f:
    data = f.read()
    f.seek(0)
    f.write(re.sub(r"<string>ABC</string>(\s+)<string>(.*)</string>", r"<xyz>ABC</xyz>\1<xyz>\2</xyz>", data))
    f.truncate()

The other way is to read the file then open it again with open(myfile, 'w'):

with open(myfile, "r") as f:
    data = f.read()

with open(myfile, "w") as f:
    f.write(re.sub(r"<string>ABC</string>(\s+)<string>(.*)</string>", r"<xyz>ABC</xyz>\1<xyz>\2</xyz>", data))

Neither truncate nor open(..., 'w') will change the inode number of the file (I tested twice, once with Ubuntu 12.04 NFS and once with ext4).

By the way, this is not really related to Python. The interpreter calls the corresponding low level API. The method truncate() works the same in the C programming language: See http://man7.org/linux/man-pages/man2/truncate.2.html