I'm not sure I fully understand the problem, but...
Have you tried positioning your mouse on the line of text that is spaced out wierd and then pressed enter? Have you tried highlighting that paragraph and and changed it from justify to align left and back?
As for the spacing...
Have you tried highlighting and formatting not just the the block quote, but also the paragraph before the quote and the paragraph after? If you go to the Format menu and choose paragraph, try toggling these options: the alignment, as well as the spacing before and after (to 0 pt?). Maybe that will help?
If you just hightlight the quote, you can format that paragraph -- it's "special" should be none while the indentation is probably at 0.5 for right and left. You likely want the other paragraphs to have a special of "first line" by "0.5" and 0 for the indent.