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How does the parser distinguish between in-p and in-em to substitute in the corresponding entities? It seems to me that when it reaches the second asterisk it's not going to be able to know whether to open or close the em element.

Is this one of those pieces of occult witchery that SGML excels at..?

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If the context (top-most) element is "em", the "in-em" shortref map is current (as per the second USEMAP declaration), which defines the replacement text for "*" to be "</em>", ending the emphasized text span. Whereas within "p", it's "<em>", starting an emphasized text span, and making "em" the context element.

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