Ok solved it.
Extra line spaces between paragraphs. Changed white-space:normal instead of “pre-wrap” as it was before in every xhtml page. Then class margin-top to 1.5em.
Now no matter how many times I hit return, it won't add breaks (and white space) between paragraphs in the preview and more importantly, in Google Play Books. (looked fine in Apple iBooks).
btw I had said that "I added a blank paragraph in Pages to separate the paragraphs with white space." But that was an early file, the latest I was using had no extra returns. I had done it the right way: Space after paragraph. And it was still adding white space. But now I know why.
