I believe a sitemap should show posts under categories, and maintain the category hierarchy.
wp_list_categories cannot be asked to include posts.
And if you follow this suggestion and try and use get_posts, you will get a nasty surprise; it will get all posts in all sub categories of the one you want. and this WILL NOT DO!
I found that you need this query and that you can inherit the category walker and pass that to the wp_list_categories method. Am impressed! Read more »