I believe you can have <span> directly under <blockquote>. It doesn't need a <p> or <div> in the middle, though it does not hurt either, and it helps keeping everything well structured.
So, your problem was that this:
Code:
<blockquote class="small">
<span class="small"></span>
</blockquote>
does not result in a "twice small" text? I think it should, i.e., relative font sizes should be cumulative.