I don't know if this is possible and I couldn't understand what Books Online
says about this (there's a surprise!), but...

Is it possible to declare a variable (not an input or output parameter)
inside a table-valued function? I need to make the select statement dynamic,
depending on the input parameter, so I need to declare something like:

DECLARE @sql VARCHAR(250)

The resulting sql would be generated via IF/CASE conditions. As the whole
sql statement is quite large, the majority would be placed in the @sql
variable at the beginning. The "where" clause is the bit that is dynamic,
which would be appended to the @sql string.

Is it possible to declare variables in such a function, apart from the
input/output parameters?

Thanks,
SQL Servant