I've stumbled onto this little trick, which allows you to quickly reformat .config files in Visual Studio (tried and tested on VS2003, but should work on the others).
With an xml file open, goto the Edit - Advanced - Format Document (shortcut keys are Ctrl-K Ctrl-D ).
I've been doing this for a long time with C# and VB.NET code, except that they use Edit - Advanced - Format Selection (Ctrl-K Ctrl-F).
Silly me to find this for .config files only just now...