One common misconception about web security is that protecting important actions with CAPTCHAs can prevent XSS attacks from doing real damage.  By preventing malicious code from scripting critical tasks, the idea goes, XSS injections won’t be able to accomplish much.

This idea is dangerously wrong. 

First of all, this should not even be considered except as a defense-in-depth mechanism.  Regardless of whether the actions you care about are protected by CAPTCHAs, XSS attacks can create arbitrary UI on your pages, and can thus make “perfect” phishing attacks.

Also, even with CAPTCHAs, an XSS injection can wait until the user performs the critical action, then change the submitted data to the attacker’s whim.

For example, if Twitter took this approach to prevent XSS injections from sending spammy tweets, the attacker could simply wait until the user sends a real tweet, then silently append advertising to the tweet as the user submits it and fills out the CAPTCHA.

However, there is also a more fundamental issue.  Since the injected Javascript is running in the user’s browser, it simply display the CAPTCHA to the user and block all page functionality until the user solves the CAPTCHA.  The attacker can even put his own text around the CAPTCHA to look like a legitimate security precaution, so that the (typical) user will not realize that the site has been compromised.  (that could be prevented by integrating a description of the action being performed into the CAPTCHA itself in a way that the attacker can’t hide)

I haven’t even mentioned the inconvenience of forcing all legitimate, uncompromised users to fill out CAPTCHAs every time they do anything significant.

In summary, CAPTCHAs should only be used to prevent programs from automatically performing actions (eg, bulk-registering Google accounts), and as a rate-limiter if a user sends too many requests too quickly (eg, getting a password wrong too many times in a row).

XSS can only be stopped by properly encoding all user-generated content that gets concatenated into markup (whether HTML, Javascript, or CSS)