xBee + WatchDog Timer + Transmission problem

Hi, I've created a sketch that uses a watchdog timer that runs each 8s. I've used a counter to wait 64s (about a minute).
In addition I've used the pin hibernation mode on the xBee.
The xBee communication together with the pin hibernation work properly.
If I add the watchdog timer it stops working.
Is the program restarted from the last row executed before the WatchDog interrupt ?

Here it's my sketch:

#include <avr/sleep.h>
#include <avr/power.h>
#include <avr/wdt.h>
#include <XBee.h>               

XBeeAddress64 coordAddr = XBeeAddress64(0x0013a200, 0x4090c5a6);
uint8_t xbeePayload[] = "Hello";
XBee xbee = XBee();

ZBTxRequest zbTx = ZBTxRequest();
ZBTxStatusResponse txStatus = ZBTxStatusResponse();

int XBee_pin = 9;          // this pins wake up xbee and put it to sleep

int counter = 0;

void sendData() { 


void enterSleep(void)
  set_sleep_mode(SLEEP_MODE_PWR_DOWN); /* EDIT: could also use SLEEP_MODE_PWR_DOWN for lowest power consumption. */
  /* Now enter sleep mode. */
  /* The program will continue from here after the WDT timeout*/
  sleep_disable(); /* First thing to do is disable sleep. */
  /* Re-enable the peripherals. */

void setup()
  //To reduce power, setup all pins as inputs with no pullups
  /*for(int x = 1 ; x < 18 ; x++){
    pinMode(x, INPUT);
    digitalWrite(x, LOW);

  pinMode(XBee_pin, OUTPUT);
  digitalWrite(XBee_pin, HIGH);

  /*** Setup the WDT ***/
  /* Clear the reset flag. */
  MCUSR &= ~(1<<WDRF);
  /* In order to change WDE or the prescaler, we need to
   * set WDCE (This will allow updates for 4 clock cycles).
  WDTCSR |= (1<<WDCE) | (1<<WDE);

  /* set new watchdog timeout prescaler value */
  WDTCSR = 1<<WDP0 | 1<<WDP3; /* 8.0 seconds */
  /* Enable the WD interrupt (note no reset). */
  //Serial.println("Initialisation complete.");
  //delay(100); //Allow for serial print to complete.

  ADCSRA &= ~(1<<ADEN); //Disable ADC  
  ACSR = (1<<ACD);  //Disable Analog Comparator  
  DIDR0 = 0x3E;    //Disable digital input buffers on ADC1-ADC5 pins
  DIDR1 = (1<<AIN1D)|(1<<AIN0D); //Disable digital input buffer on AIN1/0 

  //power_timer0_disable(); //Needed for delay_ms

void loop()
  if(counter == 8)
     counter = 0;
    pinMode(XBee_pin, OUTPUT);
    digitalWrite(XBee_pin, LOW);
    pinMode(XBee_pin, INPUT);    
    digitalWrite(XBee_pin, HIGH);
    /* Re-enter sleep mode. */


Yes it should come back to where it was when the interrupt fired as you suggest. Should the counter variable be declared volatile since it's being manipulated in an ISR ? volatile int counter = 0;

That's the first thing that leaps out at me so far,