There is a GNU GRUB bug filed on this which is bug #30257: 10_linux ignores xen hypervisor entries and dom0 kernels.
Here's an example of an actual Xen boot stanza. The dummy=dummy in the vmlinuz line is needed due to some bug in GRUB or Xen. Without it, the boot will hang or stop and hit the initramfs (BusyBox) prompt.
menuentry 'xen-4.0 osa-dom0 , with Linux 2.6.32.15-xen' --class osa-dom0 --class gnu-linux --class gnu --class os {
recordfail
insmod lvm
insmod ext2
set root='(system-dom0_0)'
search --no-floppy --fs-uuid --set cc290394-fa2a-4e13-9024-3bc5a5b9215d
multiboot /boot/xen-4.0.gz com1=115200,8n1 console=com1 dom0_mem=512M dom0_max_vcpus=1 dom0_vcpus_pin=true iommu=1,passthrough,no-intremap loglvl=all loglvl_guest=all loglevl=10 debug apic=on apic_verbosity=verbose extra_guest_irqs=80 acpi=force numa=on
module /boot/vmlinuz-2.6.32.15-xen dummy=dummy root=/dev/mapper/system-dom0_0 ro quiet earlyprintk=xen loglevel=10 debug acpi=force console=hvc0,115200n8
module /boot/initrd.img-2.6.32.15-xen
}
GRUB_CMDLINE_XEN_DEFAULT=" com1=115200,8n1 console=com1 dom0_mem=512M dom0_max_vcpus=1 dom0_vcpus_pin=true iommu=1,passthrough,no-intremap loglvl=all loglvl_guest=all loglevl=10 debug apic=on apic_verbosity=verbose extra_guest_irqs=80 acpi=force numa=on"