When I was working on the formatting for THE CORPSE KING, I discovered an interesting quirk.
Amazon’s instructions indicate that you should use the Kindle Previewer application in order to determine whether you’ve correctly formatted your book. From what I’ve discovered, it appears that Kindle Previewer and the Mobipocket Viewer (which comes with Mobipocket Creator, the application used to create the PRC file that actually gets uploaded to Amazon) see things the exact same way. These are the two things which I used to format the Kindle version of ELEGY.
As I was working on THE CORPSE KING, though, I accidentally opened the file in my recently-installed Kindle for PC. It hadn’t even occurred to me that it would see things differently.
Well, it does.
For some reason, Kindle for PC reads the HTML formatting completely differently than the Kindle device, the Mobipocket Viewer AND Kindle Previewer. Why Amazon didn’t simply use the same core programming for Kindle PC I’ll never know, but things get all smushed together unless you specifically format for both.
If you don’t have Kindle for PC, I highly recommend you download it if you intend to publish on Kindle. I don’t know what exactly the demographics are for Kindle PC or how many people use it, but having your book appear completely different on two slightly different platforms is just not the way to go.
Technically speaking, the difference appears to be how Kindle for PC interprets the paragraph tag “<p>” vs. the “<br>” line break tag. Whereas the Kindle device (as well as Smashwords’ Meat Grinder) correctly interprets the paragraph tag and places lines between them when extra ones are used, Kindle for PC does not.
It is possible to format your book to work correctly on both Kindle for PC and the other devices via judicious use of the line break (<br> in HTML, or Shift+Enter when you’re editing your original Word Document).
The point is, make sure you check your PRC file in both programs before uploading. It might just save you some embarrassment later.
Eye of the Storm 
I’ve not had this problem myself during conversions. Are you defining the paragraph spacing values in your CSS? I use tags only very rarely.
That is actually where I ran into the problem. The paragraph spacing values were predefined, so I assumed that it was working properly. It was only when I loaded the file into the Kindle for PC program (accidentally, I might add) that I noticed that they were not spaced properly, so I had to resort to using tags to make it work correctly.
Mobipocket Reader and the Kindle Previewer both looked exactly like I wanted… it was just Kindle for PC that somehow interpreted the code differently, and I don’t know why. Odd, no?
I’m running a website at the moment for Kindle conversion — if you go to this page, there are some sample HTML files you can download: http://bit.ly/oTLgp0
If you go to the example with spaced paragraphs, it looks as you’d expect on Kindle for PC and Kindle Previewer when you convert it using Calibre or Mobipocket Creator. If you look at the code–the HTML is very basic. See if that helps.
Great, I’ll check it out! Thanks for the info, Paul!