@Barty: alt font "hack" (done via reader.pref editing) only works for old mobi format, not kf8/azw3 (default font,Caecilia, is used for azw3). If you want to use the same font for both mobi and azw3 you will have to jailbreak your Kindle 3 and install
this font hack, delete
nobrowser file (to activate support for azw3 nad web browser font), and add you custom font files, and restart your Kindle 3. But first read all the instructions for that font hack (so you don't get suprised when you realize that Kindle restart takes quite some time).
As for the huge line spacing, try using
modified version of Charis SIL font, which was modified to have smaller/normal (quite similar to line spacing of old mobi books) line spacing when you're reading azw3 book.