Is there a better way to create dynamic time averaged series over a dynamic frequency?
Your join between the tables is embedded in a function making it really hard for the optimizer to do anything smart with it. I guess it has to compare every row in one table against every other row in the other table. 

Rewriting your join with a range check should be a lot faster. I also added a primary key to your table variable to remove a sort operation from the query plan and I turned your table variable into a temp table instead. The difference in my tests was that the query plan started to use Parallelism.

declare @start datetime;
declare @end datetime;
set @start = '20120301';
set @end = '20120303';
declare @interval int;
set @interval = 300;

create table #tpart
(
  dt datetime primary key
);

with CTE_TimeTable
as
(
  select @start as [date]
  union all
  select dateadd(second ,@interval, [date])
  from CTE_TimeTable
  where dateadd(second, @interval, [date]) &lt;= @end
)
insert into #tpart
select [date]
from CTE_TimeTable
option (maxrecursion 0);

select t.dt, avg(c.x1), min(c.x1), max(c.x2), avg(c.x2), min(c.x2), max(c.x2)
from clean.data c
  inner join #tpart t 
    on c.Date &gt;= t.dt and
       c.Date &lt; dateadd(second, @interval, t.dt)
group by t.dt;

drop table #tpart;


Note: This query does not return exactly the same intervals as your query does. It will divide the date range into equally sized parts where your query had one half interval at the start and one half interval at the end of the range. It is of course possible to modify the query to do be equivalent to your query if that is desired.  

Update

I tested on a table with a total of 1036801 rows and with 34560 in the interval 2012-03-01 to 2012-03-03. In my tests the original query takes 4.1 seconds. The query above takes 0.1 seconds.

Script to generate the test data:

create table clean.data
(
    Date datetime primary key,
    x1 int,
    x2 int
);

go

with C as
(
  select cast('20120201' as datetime) as D
  union all
  select dateadd(second, 5, D)
  from C
  where D &lt; '20120401'
)
insert into clean.data(Date, x1, x2)
select D, checksum(newid()) % 1000, checksum(newid()) % 1000
from C
option (maxrecursion 0);