I am an engineer rather than a chemist, so you can take my opinions with a grain of salt but:
1) Yes xylene will raise the octane of regular grade pump gasoline. I cannot tell you what the optimum mix ratio might be, though.
2) Moderate amounts of xylene (<5%) should have no effect on seals and other components in gasoline systems. Xylene is a naturally-occuring consituent in gasoline.
3) I would be surprised if oil companies were currently using xylene as an octane booster. In these days of 'reformulated gasoline', they are trying to minimize the hazardous air pollutants (HAPs) in the product. On that note, you are probably breaking a couple of laws when you pour untaxed (no highway tax paid) poison in your fuel tank. If you were to use waste xylene (already used in some cleaning process and discarded), then you would definitely be breaking a federal law by adding it to your tank.
4) If you are buying xylene at the hardware store, I would not expect that you would save enough, relative to the cost of higher octane fuel, to make it worthwhile. I would have to research the amount required and the cost of xylene to figure that out.