To my surprise I discovered the rather annoying (Enter –> double line spacing conversion) which is really an annoying convention adopted by blogger and for the new editor (what they call new look) the old setting –> Formatting –> No line breaks is absent.
What I found that could solve this problem. Go to posts from the browser and pick any old post and choose options on the right hand side and choose the radio button Enter to line Breaks. That should eliminate all the extra spaces in the inserted code.
As to whether it will be systematically applied to all the future posts I am not sure of it. But I kind of hope that it will persist, because it is really cumbersome to edit every post in the browser after posting it from the Windows Live Writer.