First, contrary to xen-3.1.0-src.tgz, xen-3.2.0.tar.gz doesn't come along with the linux-2.6-xen-sparse/ and patches/ directories which allow to build a «xen-infied» kernel from a vanilla kernel source. Thus it is impossible to use make world XEN_LINUX_SOURCE=tarball.
By default, make world will use Mercurial to pull down (or «clone» in Mercurial vocabulary) the xenified kernel from Xensource's Mercurial repository. Unfortunately, it seems that the current Mercurial version shipped with Debian/Ubuntu is outdated and cannot be used out-of-the-box. Nonetheless, it is possible to fetch the xenified kernel manually.
From my understanding, it is necessary to "make prep-kernels" in order to create the kernel build directory. Indeed if you put your .config file directory into the kernel tree itself, the kernel's build system will complain about the lack of cleanliness and will ask you to run "make mrproper". This is baffling but it appears that whenever the kernel is asked to store the object files in a separate directory (namely build-linux-2.6.18-xen_x86_32/), it makes sure you didn't create your .config file in the wrong directory. I suppose this is a safeguard.
So I devised with the following process to build Xen 3.2.
root# mkdir build
root# wget http://bits.xensource.com/oss-xen/release/3.2.0/xen-3.2.0.tar.gz
root# tar xzf xen-3.2.0.tar.gz
# Download the xenifid kernel tree manually, but NOT in xen-3.2.0/
# because the buildconfig/select-repository script would skip it.
# ! xen-3.2.0/ and linux-2.6.18-xen.hg/ must be at the same level !
root# hg clone http://xenbits.xensource.com/linux-2.6.18-xen.hg
root# cd xen-3.2.0
root# make prep-kernels
root# cp /boot/config-2.6.18-my build-linux-2.6.18-xen_x86_32/.config
# Using the world target will clean everything first. Don't use it here.
root# make dist