[man]readfile/man outputs a file, it doesnt return a string.
You can use file_get_contents() instead, assuming you are running PHP 4.3.0 or better
(most updated would be to run PHP 4.3.6)
<?php
$one = "<table width='100%' border='1' cellspacing='1' cellpadding='1'>";
$two = "<tr>";
$three = "<td> " . file_get_contents('news.txt') . " </td>";
$four = "</tr>";
$five = "</table>";
$format = "$one <BR> $two <BR> $three <BR> $four <BR> $five";
echo $format;
?>