I forgot to mention in the description my work around.
I use saveXML instead, which works. However, this also breaks my code because the CDATA node markup in script tags cause the scripts to break in browsers, regardless of whether it's the official standard. To get around this I used preg_replace to surround the <![CDATA[]]> markup with javascript /*comment*/ markup.

Thank you for this bug report. To properly diagnose the problem, we
need a short but complete example script to be able to reproduce
this bug ourselves. 

A proper reproducing script starts with <?php and ends with ?>,
is max. 10-20 lines long and does not require any external 
resources such as databases, etc. If the script requires a 
database to demonstrate the issue, please make sure it creates 
all necessary tables, stored procedures etc.

Please avoid embedding huge scripts into the report.

This works fine for me:

<?php
$dom = new DOMDocument;
$dom->loadXML('<select><option>foo</option><option 
selected="selected">bar</option></select>');
foreach ($dom->getElementsByTagName('option') as $option) {
    $option->removeAttribute('selected');
    $option->setAttribute('selected', 'selected');
}
echo $dom->saveHTML();
?>

The problem only occurs with multiple select elements. It seems to work fine if I'm using the DOMElement::getElementsByTagName method, but I was able to reproduce it using the DOMXPath::query method.

<?php
$html =<<<EOF
<form>
  <select><option>foo</option><option>bar</option></select>
  <select><option>hello</option><option>PHP</option></select>
</form>
EOF;
$dom = new DOMDocument; $dom->loadHTML($html);
$xpath = new DOMXPath($dom);
$selects = $xpath->query('//select');
foreach ($selects as $select) {
    $options = $xpath->query('//option', $select);
    foreach ($options as $option) $option->removeAttribute('selected');
    $options->item(1)->setAttribute('selected','selected');
}
echo $dom->saveHTML();
?>

Your XPATH query overrides the context node: //options always fetches the all options, not those from the current select.