You can use Firefox to click a link to the file on a web site, or you can use the add-on manager. (For details, see Find and install extensions on Firefox for Android.)

Or if you already have the XPI file saved on your phone, you can type "file:" in the Firefox address bar to find and open it. It is probably somewhere inside the "sdcard" folder.

Thanks but I'd tried that. The firefox 4.0 beta for android lets me find the file using the address bar and - file://sdcard/downloads/hybridfox-1.6.000030.xpi

but then clicking on the file only gives 2 options: 1) Open Link in New Tab 2) Save Link

Selecting "Open Link in New Tab" doesn't "install" the .xpi file it just opens a blank new firefox tab.

Not sure if this is what you're looking for, but I found this:

Installing Extensions can be hosted on websites and installed using installTrigger. Make sure the webserver is serving the extension XPI with the right MIME type (application/x-xpinstall). The add-on installation UI should appear after clicking the link. Fennec supports a basic Add-on Manager user interface, which allows a user to manage extensions. Using this interface, a user can also find and install extensions from AMO (addons.mozila.org). Extensions can be removed using the same dialog.

source: https://wiki.mozilla.org/Mobile/Fennec/Extensions