I've never had any compatibility problems with using 1.44MB drives in place of 720KB drives either. 5.25 drives are another kettle of fish. Here is what i would recommend to make a boot floppy.

1. Wipe a 1.44MB disk with a magnet then tape over the density hole. Or just get a 720K disk.
2. Format it with "format a: /s" then try to boot it in the system you made it in. If you get this far, you know you have a working 720K boot disk.
3. Then try it in the XT.

IIRC some model M's have auto sensing and can do XT and AT. Though some probably can't.

Not sure what floppy controller you were using but an AT IDE controller will never work on an XT. It needs the 16-bit bus. The floppy controller part of it however should work fine in an XT. As already stated it wont be able to do HD 1.44MB disks.

By the way, some later floppies have optical sensors so clear tape over density or write protect holes (Not required here) might not work.

edit: I've also seen problems with stretchy tape, such as medical tapes, or really thin cheapy tape where the mechanical switch had a stuff enough spring to push a dent in it and thus fail to register what you wanted it to.

I was able to create a 3.5" 720KB DOS boot disk on another system, but I am now struggling with being able to boot it on the XT. My only IO controller is a 386-era 16-bit ISA 1.44MB 3.5" HD floppy controller, and it does not look like it has jumper configuration to downgrade itself to driving a 3.5" HD floppy drive in DD mode. I don't have a functional 3.5" DD drive, and not sure even if I had, whether the IO controller would somehow autodetect it and run the DD drive in DD mode (but it would probably just try driving it as a HD drive?)

I suppose I'll be ebay shopping for a 3,5" DD controller and a DD drive if I want to boot.

Btw, how feasible is it to fix 5.25" floppy eating disk drives in general? The 360KB DD 5.25" disk drive I've tried is creating physical damage to the inner ring of any disk I put in.. I wonder if it's just dead. Darn, 360KB DD 5.25" floppy drive prices are quite high on ebay - maybe I'll just have to stick to 3.5", even though 5.25" might be way cooler 😒

It should just work. The controller doesn't need to be jumpered to DD. It's just that the XT wont be able to use the HD data rate used by 1.44MB disks. If you read a 720KB disk on an AT, the controller is behaving as it would on an XT. All floppy controllers have no idea what you have connected to them. The BIOS tells them in an AT, the dip switches on the motherboard tells them on an XT. Floppy controllers aren't smart.

Does the disk+drive+controller boot in another system?

I dunno how to fix the ring being pinched in the 360K drive. All i could suggest is a general cleaning and lubrication of the mechanical components. i had this problem years ago, but can't remember if i was able to fix it or not.

Yaha an AT controller has config bits stored in CMOS (or real early ones, maybe switches on motherboard, also poss for onboard FDC) but an XT controller either supports low density period, or had jumpers to set the bits for 720/1.2/1.44. Also other facilities on a 16 bit i/o card may confuse it, like an HDD controller that's set for an IRQ that doesn't exist on XT etc.

If you're in Europe, look out for broken Amstrad/Schneider PC1512/PC1640s. The base units typically contain one or two DD 5.25" drives. This is how I got mine. (They will be white though which may not match the rest of your build.)