No, it is an error because section 4.6 says:
If the entities in question are declared, they must be declared as
internal entities whose replacement text is the single character
being escaped or a character reference to that character, as shown
below.
[...]
<!ENTITY amp "&#38;">
[I suppose you could interpret this as saying that "&" is legal
because its replacement text is an ampersand character, but in that
case there is a bug in the standard.]
-- Richard