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The problem is not function inside function... The problem is the second argument for function replace is a regular expression...
As the char . is reserved in regex you have to escape it using \. to make it work for your case...
<xsl:value-of select='replace(format-number(/ns0:SyncItemList/ns0:DataArea/ns0:ItemMaster/ns0:Item/ns0:ItemSpecificationGroup/ns0:SpecificationGroup[oa:Name = "PTC_LABEL_INFORMATION"]/ns0:Specification[oa:Name = "LABEL_WEIGHT"]/oa:ValueText,"#.0000"), "\.","")'/>