Well, to update this saga...
I ran my Word manuscript through the good old Meatgrinder of Smashwords.
It produces the absolute PERFECT ePub, at least on my Nook Simple Touch.
Em dashes are fully preserved. Line spacing now works. Lines with italics now don't interfere with line height.
I'm too tired right now, but tomorrow I'm going to explode that ePub and see what Mark Coker knows that not many others do.
I now feel bad about every bad thing I'd previously said about the Meatgrinder.