I have a simular problem and the "Remove spacing between paragraphs" has been overkill.
I have 0.6.17 and am converting ##.txt files to MOBI. I use the "Treat each line as a paragraph" setting and end up with a blank line between each paragraph. If I use the "Remove spacing..." it removes all extra blank lines even those between chapters and breaks in the story. Is there any way to remove the extra blank line added by the conversion but leave the ones within the original text file?
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