I'm linking building in SMALL model.
Good, if that will not do, the '51 is the wrong processor for the job.

1. is there a way to change the declaration included in a prototype function to XDATA ?
2. More generally, when writting in C, is there a way to automatically declare a variable in XDATA without writting 'xdata U8 variable;'
1) I do not quite understand "prototype function" but if you are referring to data passed in a function call they (at least the first 6 bytes) are passed in the registers and do thus not affect your DATA useage.
2) no, but what is the problem with that, you will still want your "heavy use" variables in (I)DATA for speed.

Erik