Just done a test with your few lines, and there's a problem, the lines still get joined together.
I done a test with Textile styled text
Code:
h3. Blockquote Test
bq. This is a blockquote
section of markdown.
bq. Hardwrap with 2 trailing spaces.
Use for quotations/poetry
And with the 'off' paragraph setting this converts/works properly.
Code:
<h3 class="calibre1" id="calibre_pb_0">Blockquote Test</h3>
<blockquote class="calibre2">
<p class="calibre3">This is a blockquote<br class="calibre4" />
section of markdown.</p>
</blockquote>
<blockquote class="calibre2">
<p class="calibre3">Hardwrap with 2 trailing spaces.<br class="calibre4" />
Use for quotations/poetry etc.</p>
</blockquote>