[GeoffR]

You need to untick the margins box in the Filter style information tab. (Edit: As well as unticking the Remove space between paragraphs box)

The default paragraph margin (for ePub and KePub) is 1em. Most publishers set the paragraph margin-top and margin-bottom to zero. Your current settings are removing that zero margin, which results in the default 1em margin taking effect.

Edit: The remove space between paragraphs then removes that space again, but it is also removing space that shouldn't be removed.