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A two-way relay channel is considered where two users exchange information via a common relay in two transmission phases using physical-layer network coding (PNC). We consider an optimal decoding strategy at the relay to decode the network coded sequence during the first transmission phase, which is approximately implemented using a list decoding (LD) algorithm. The algorithm jointly decodes the codewords transmitted by the two users and sorts the L most likely pair of sequences in the order of decreasing a-posteriori probabilities, based on which, estimates of the most likely network coded sequences and the decoding results are obtained. Using several examples, it is observed that a lower complexity alternative, that jointly decodes the two transmitted codewords, has a performance similar to the LD based decoding and offers a near-optimal performance in terms of the error rates corresponding to the XOR of the two decoded sequences. To analyze the error rate at the relay, an analytical approximation of the word-error rate using the joint decoding (JD) scheme is evaluated over an AWGN channel using an approach that remains valid for the general case of two users adopting different codebooks and using different power levels. We further extend our study to frequency selective channels where two decoding approaches at the relay are investigated, namely; a trellis based joint channel detector/physical-layer network coded sequence decoder (JCD/PNCD) which is shown to offer a near-optimal performance, and a reduced complexity channel detection based on a linear receiver with minimum mean squared error (MMSE) criterion which is particularly useful where the number of channel taps is large.