I did something very similar to this on a recent project. I used jqGrid for display purposes - it can easily be bound to JSON-formatted data (and probably XML-formatted data too), and it supports click-column-header-to-sort. I would definitely recommend it for functionality and ease-of-use.
I didn't have to implement user-configurable showing/hiding of columns. However, it could be done with jqGrid pretty easily: the grid columns are configured in javascript, so you could use code-behind logic during the initial page-build to customize the javascript which defines the column configuration.
I definitely wouldn't return HTML from an ASHX class, since you'd have to craft all the HTML by hand using StringBuilder (or something similar). Makes the code tougher to maintain; and if you ever want to change the page layout, you need to re-compile and re-deploy your system. If you desperately want to return fully-formatted HTML, I would probably use jquery/ajax to just call a .ASPX page. That approach is clunky and heavy-handed - but at least .ASPX is geared toward generating full HTML, unlike .ASHX.
You might want to consider returning JSON instead of XML. It makes for smaller, faster responses over the wire, and is amazingly easy to work with, within javascript. In that case, you should consider using ASMX instead of ASHX to generate the JSON, since it can be configured to automatically serialize your returned object as JSON. That's what I did on my project, and it was very fast and easy to develop.
Finally, I VASTLY prefer jquery and ajax to Microsoft's ajax and updatePanels. This stackoverflow thread details the reasons why.