I'm going through Analytical mechanics of space systems.

It says base vector $\hat n$i is related to $\hat b$i through a single axis rotation about $\hat e$ as shown in the figure above. The angle between $\hat n$i and $\hat e$ is given as ${\xi_i}$ with the following identity: $\hat e$.$\hat n$i = $cos{\xi_i}$ = ei
My questions:
1. To do a rotation about $\hat e$, is it not necessary for $\hat e$ to be perpendicular to $\hat n$i? I always thought you could only do rotations about an axis if the axis was normal to the plane.
2. Is there 2 planes involved? One containing $\hat e$ and $\hat n$i and the other containing $\hat n$i and $\hat b$i?
3. Is the angle between $\hat b$i and $\hat e$ also ${\xi_i}$?
The author is decomposing the rotation into in-plane and out-of-plane components. $\hat{e}$ is in the out-of-plane direction (i.e. the rotation axis which is invariant in the rotation). $\hat u$ and $\hat v$ are a basis for the in-plane component of the rotation. Equation (3.63) merely decomposes the rotation into these two components $\cos{\xi_i}\hat e_i$ is the component of $\hat n_i$ in the out-of-plane direction and $\sin{\xi_i}\hat u'$ is the in-plane component for which the basis is $\hat u$ and $\hat v$, i.e. equation (3.64).
Here are my answers to your updated questions:
No. It is not necessary. Any point in space can be rotated around an axis. To be sure, every point will stay in a plane perpendicular to $\hat e$, but the point itself does not have to be perpendicular. There is a difference between where the point is and how it moves.
The plane that is most relevant is the one spanned by $\hat u$ and $\hat v$. That is the plane in which the point stays during the rotation. The plane containing $\hat e$ and $\hat n$i rotates around $\hat e$. The plane containing $\hat n_i$ and $\hat b_i$$ is not relevant to the rotation computation.
Yes. The vector $\hat n_i$ sweeps out a cone around $\hat e$ as it rotates to $\hat b_i$. The angle ${\xi_i}$ stays fixed as this motion occurs.
In the author's picture he is using the following procedure:
This should give you a mental picture of how to understand the figure. Unfortunately it is complicated by the fact that it illustrates the rotation of a basis vector rather than a point in space.
By the way, the intersection of $\hat e$ with the circle at its tip and tail is merely coincidental in the picture. The circle does not intersect $\hat e$.