I can start the program “Xephyr” from the software package “xorg-x11-server 7.6_1.14.2-247.14” a few times after a fresh log-in. Unfortunately, I stumble on the message “Xephyr cannot open host display. Is DISPLAY set?” for another restart try after a previous application window was closed.
Didn’t understand your post.
Are you saying you successfully launched Xephyr but after closing and attempting to run another test you’re seeing this message?
If that is the case, then it suggests that either your previous “run” wasn’t terminated completely or the configuration only thinks that the Display is unavailable.
Or, did you mean something else?
I don’t use Xephyr, so I’m speculating purely based on the information you provided in your post.
TSU
That sounds right.
I’ve tried to reproduce, but can not. I’ve tried by launching both standalone apps in the Xephyr display and window manager sessions, closing them, and then washed, rinsed, and repeated several times. In all cases, the server contnues to relaunch and work fine.
I also note that if the server is still running, (and say you’re unaware of that) but you go and attempt to relaunch a “new” xephyr session on the same display, you will get the expected behaviour:
Fatal server error:
(EE) Server is already active for display 1
So, that begs the question why the “Xephyr cannot open host display. Is DISPLAY set?” message is generated. I would start by examining how you’re launching xephyr
Yes. - Now I guess that it happened because I fiddled with the command “export DISPLAY=…” in an inappropriate way in my previous terminal session.
I should be a bit more careful with the setting for this environment variable. :
Would you like to “play” with nesting of display managers?
Example:
~> Xephyr -screen 1280x990 -host-cursor :1 &
~> DISPLAY=:1 icewm &
~> DISPLAY=:1 Xephyr -screen 1024x768 -host-cursor :2 &
~> DISPLAY=:2 fvwm2 &
Would it become possible to see XFCE, KDE or GNOME also in such an embedded application window?
Yes, of course
http://paste.opensuse.org/view/raw/73876645
Seen is Firefox running on a mate session that is embedded in a Razor-Qt session (with a terminal open), which is itself embedded in KDE
DISPLAY=:1 /usr/bin/razor-session
DISPLAY=:1 /usr/bin/mate-session
DISPLAY=:1 dbus-launch /usr/bin/startkde
...
Adjust display value accordingly
Thanks for your feedback. - Nice screen shot! 
I would be interested to know a bit more about the needed start commands for desktop environments.
Would you like to share any more experiences around issues like the following?