open wmd.js, comment or delete line 2081 and line 2264, which is:

chunk.addBlankLines(); //-----line 2081

and:

chunk.addBlankLines(nLinesBefore, nLinesAfter, true); //------line 2264

I don't know why, but I got it from debug and debug for a full day. I hope it is usefull.

Answer for dougvk --- Context of these lines as follow in the version which I am using:

command.doBlockquote = function(chunk, postProcessing, useDefaultText){
    ......
    if(/^(?![ ]{0,3}>)/m.test(chunk.selection)){
    command.wrap(chunk, wmd.wmd_env.lineLength - 2);
    chunk.selection = chunk.selection.replace(/^/gm, "> ");
    replaceBlanksInTags(true);
    //chunk.addBlankLines();                         //-----line 2081
}
    .....
}

And:

command.doList = function(chunk, postProcessing, isNumberedList, useDefaultText){
    ......
    chunk.trimWhitespace(true);
//chunk.addBlankLines(nLinesBefore, nLinesAfter, true);  //------line 2264
chunk.startTag = prefix;
var spaces = prefix.replace(/./g, " ");
command.wrap(chunk, wmd.wmd_env.lineLength - spaces.length);
chunk.selection = chunk.selection.replace(/\\n/g, "\\n" + spaces);

};