XPS @1" thickness is not a vapor barrier. Taping the seams doesn't make it a vapor barrier either, but it does make it into an AIR barrier, which stops the all-important convective transfer of moisture.
When we're talking vapor barriers/retarders, we're only talking about WATER vapor, and how easily it diffuses through the material when there are differences in VAPOR pressure from one side to the other. When talking about AIR barriers/retarders we're talking about how much air can move when there is a difference in AIR pressure from one side to the other.
They're not the same thing. A sheet of foil or poly in a wall that has large slices in it is still a very powerful vapor barrier, but a lousy air barrier.
Both are important for controlling moisture transfer in building assemblies, but air leaks are by far the greater cause of moisture problems in building assemblies.
At 1" the permeance of most XPS sheathing runs ~1.2 perms, which is considered only "semi-permeable". At 2 inches it's ~0.6 perms, and semi-IMpermable, but still more permeable than an asphalt loaded kraft facer (~0.4 perms).
In order to keep groundwater from wicking up to the foundation sill and rotting it out over time, you need the foundation insulation to be at least somewhat permeable- over half a perm is good, over 1 perm is better. That means no- more than 2" of XPS between the concrete & studwall, but importantly NO KRAFT FACERS OR ANY OTHER VAPOR RETARDER in the stud insulation- only unfaced fiber (batts or blown) or semi permeable half-pound foam (up to ~8"). The concrete must be allowed to dry toward the interior below grade. This means no facers, no poly no vinyl or foil wallpapers, only standard latex paints (2-5 perms) for an interior finish.
Going tighter than that on the below grade portion puts the foundation sill at risk unless you have a good capillary break between the concrete & sill such as metal flashing, membranes, or at the VERY least a foamy sill gasket. (Be sure to put a capillary break between the new studwall plate and the slab too, eh?)
Where there's a pony wall with a step in at the sill or concrete, cobble-in rigid foam to even up the sill to the concrete so that you can fill the gap between the new studwall and the original studwall with fiber insulation without putting the insulation in contact with he concrete. If you leave a gap in there you would have two issues:
1: Infiltration air would be able to pass through that gap unimpeded (this is called a "thermal bypass").
2: Air would be able convect between the batting in the new studwall and the cavity , lowering it's effective R value by at least 1/3 (more, as the temperature difference across it increases. Low & mid-density fiber insulation only achieves it's rated R if it has full air barriers on BOTH sides.
Even small gaps count- don't just jam rigid foam in there reducing the gap to an inch- ELIMINATE it by compressing tightly fitted batting in there. The gap between the foundation-top pony wall is most likely never going to come out at a standard batt depth, but it's just fine to compress UNFACED R11 or R13 batts in into a 2-3" gap. It's R per inch will rise when you do that but it'll be fewer inches, for a lower overall R value. (An R11 batt compressed to 2.5" is about R9. An R19 batt designed for 2x6 framing is R13 when jammed into 3.5" 2x4 stud bay, and go figure- it weighs the same as an R13 batt.) All batt installations need to be nearly-perfect, with no compressions or gaps, or it will not live up to rating. (Batts routinely underperform blown insulation at identical ASTM C 518 rated R values due to installation errors/defects. Perfection is difficult, but do your best.)
BTW: Below grade it's safer to use rock wool or fiberglass rather than cotton batting. Cotton is hygroscopic, and could absorb quite a bit of moisture before you detected it, should your foundation ever crack & leak, or when the once every 20 years rainstorm or hot water heater causes minor flooding. Rock wool and fiberglass would dry quickly and wouldn't wick moisture up the wall. Cotton & cellulose would. (I'm a big fan of cellulose in other areas though.)
The amount of foam you need on the above-grade portion of the foundation to avoid wintertime condensation problems inside the stud bay will vary by climate- it's the ratio of foam R to total R, and at what depth in the insulation the dew point of the interior conditioned space occurs. As a practical matter, as long as the interior surface of the foam at the average/mean winter temperature is above the dew point, there is almost no risk. In Seattle it takes almost no foam to achieve that end, since by convention (based on lots of field data) the dew point of winter interior air is rarely above 40F, and the mean January temp in Seattle is about 40F (on the EXTERIOR of the wall.)
If using XPS, a half inch is enough to be protective, but it's not much R, and it's cost effective from a utility savings point of view to go a bit fatter to achieve a higher total "whole-wall" R. The value-proposition would be to use 1-2" of unfaced EPS (beadboard, like a cheap cooler or coffee cup) for R4-R8. Adding that to a 16" o.c. studwall with batts would come to ~R15 (1" EPS) to R19 (2" EPS) after the thermal bridging of the studs & plates are factored in. Considering that 2x6 framing with a 20% framing fraction (typical for simple-framed walls with a few windows & doors, no bumpouts) and fiber insulated cavites comes in at about R14 whole-wall, going a whole lot more than R20 wouldn't make much sense.
You can glue the rigid foam to the wall with blobs of foam-board construction adhesive (standard adhesives have solvents that interact with polystyrene foam- get the right stuff.) Seal the seams & edges with 1-part foam or duct-mastic, not tape to make it air tight, then build the studwall snug up against it, trapping it even if the adhesive bond to the concrete eventually fails.
The SUPER value proposition is to find a local source for reclaimed sheets of roofing insulation. Fiber faced iso and unfaced EPS are pretty common, and typically sell at 1/4-1/3 the price of virgin-stock. A 2" sheet of iso runs ~R12, (R10, if its 1.5" iso, 0.5" perlite bonded to one side, a common insulation under torch-down roofs). Fiber faced iso will run from 0.5 to 1 perm, sometimes higher, but it's fine for this application. I did my basement with reclaimed 3" fiber-faced iso (R18), and NO studwall, trapped in place by furring through-screwed to the foundation, with the gypsum mounted onto the furring. I paid $20/sheet for 4'x8', and I've seen it since for less (virgin goods run $55-60/sheet.) Compare that to box-store pricing on 1.5" XPS + unfaced batting to achieve the same performance.
Other types can work as well, high density rigid fiberglass or rigid rock wool etc, as long as you don't go low-permeance on the facers (like steel clad) or wood/paper on both sides (you don't want wood facers against the concrete if you can help it, from a mold point of view.) Craigslist can be your friend:
http://seattle.craigslist.org/skc/mat/2785589513.html
http://seattle.craigslist.org/skc/mat/2785591503.html
^^^this stuff might work for you, since you're looking at ~65" on the concrete.^^^
But if it's a bunch of inconsistent dimensions it's probably not worth the cut'n'cobble pain.
4x8 and 4x4 roofing insulation deals DO come up, and they're cheap when they do. Searching on "rigid insulation" or "foam insulation" in the materials section occasionally never hurts. Virgin-stock unfaced EPS & fiber faced iso roofing insulation can usually be had from material-distributors who usually deal with commercial construction contractors, but the won't special order it for a homeowner on a project that small- you may have to wait if they're out of stock. You may be able to find reclaimed goods by calling roofing contractors who do flat-roofs/commercial roofing as well (or even demolition contractors.)