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We've done a survey on this before - in the "Book Uploads" forum, I think it was. It came out about 50:50 between people who like paragraph spacing, and people who don't.
It's not necessarily an "either/or" choice: for example, many people prefer paragraphs to be spaced on a small screen, such as a PDA or iPod, but prefer paragraphs to be indented on a larger screen, such as an eInk Reader.
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