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string(118) "Smarty error: [in template:17 line 16]: syntax error: unrecognized tag 'literal' (Smarty_Compiler.class.php, line 583)"

I have detemrined it's because of the {literal} tag inside my template (I used yours as a guideline)

Whats causing this Smarty error - should I just remove {literal} from my template? Whats it's for?

{literal} {/literal} tells smarty not to process tags between those tags, e.g you want to who in your page how a certain thing was done you could have

{menu}

this menu was created with {literal} {menu} {/literal} and it will print out the {menu}. another fine place to use literal is for css rules where smarty tries to find a tag for the div#something { color:red; } but would of course fail.

Most probably you have some broken files in your installation....

hope this helps