Current MediaWiki handling of vertical whitespace is a bug, plain and simple. Someday it'll bug me enough to learn PHP to fix it. Multiple blank lines in the source should not mean multiple blank lines in the output. I support hacks to fix really ugly cases, but I think here the solution is to fix the code, not make the articles an ugly mess to work around it.
As far as the extra blanks line for each category line, there is a very simple patch that seems to correct this available at bugzilla.wikipedia.org, only waiting for someone with access to implement it.
-Rich Holton (en.wikipedia:User:Rholton)
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