Ok, this is weird. First, I checked what you said and found no characters at all and the data file has no spaces either. So what I finally found that worked is this...
1. create the label document
2. when it is time to insert the placeholders, use a regular carriage return after each line (don't hold shift return)
3. When you click OK, your labels will, by default I guess, have 10 paragraph spacing after each paragraph. change this to 0 and it will bring back to single spacing and viola, blank lines are magically suppressed, both in preview and in output.
I think this might be a bug of some sort. If you do a "shift - return" when arranging the placeholders, it won't allow you to change the paragraph settings, which doesn't trigger the suppression of the blanks.
I hope this makes sense. Maybe it will help someone else out at some point.