When you go to convert a text file, a "TXT Input" settings panel becomes available in the left side of the convert screen.
If your input text has indentation at each paragraph, or if there is a blank line between paragraphs, you can use the "Paragraph style" dropdown. "Block" will use blank lines to determine actual paragraphs, and "Print" will use indentations. (Look at the tool tips.)
If your input text is just a long list of short lines, with no indication of where actual paragraphs should be, then the heuristic processing is your next best bet. It will use the length of short lines to try and guess the paragraph boundaries. It will maybe give pretty good results, but will not be perfect.
How well any of this works depends on the consistency of the input text. If you have inconsistent indentations or blank lines, or if there are, by chance, many paragraphs that end in long lines rather than shorter ones, you should edit the input text first, to get good results.
If you are doing a copy/paste to gather text from a web page, your best bet is to paste it into Word or Writer first, fix it up there, and then convert the word processor doc to epub.
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