Q1: I think it's one of those super-secret line-feed characters that you have to use the backspace or delete key to get rid of.
But if you insist on using regex: you can search for \n (or \u000A if you want it to look cooler) and replace the one you want to remove with nothing (or a space if you need some separation).
I think you're just used to the way Tidy prettifies markup.
Q2: eliminating nested blockquote montrosities (leaving the outermost) is a tool I'd like to get around to creating for the editor, but alas ... it's not something I'm currently working on.