sql error creating function

When I psql -f f.sql
I get the following error:
psql:f.sql:10: ERROR: relation "fragset" does not exist
CONTEXT: SQL function "fragments"

> cat f.sql
Create Or Replace Function fragments(character varying)
Returns setof character varying
As $$

Create Temporary Table fragset (smiles character varying);
Insert into fragset Values ('COCNC');
Insert into fragset Values ('COCNCc1ccccc1');
Select smiles from fragset;

$$ Language SQL;

But, if I paste into a running psql the commands:

Create Temporary Table fragset (smiles character varying);
Insert into fragset Values ('COCNC');
Insert into fragset Values ('COCNCc1ccccc1');
Select smiles from fragset;

it works fine.

What is wrong in the function definition?
I'm using 8.1.3

Thanks,
TJ O'Donnell