A paragraph is simply one or more consecutive lines of text, separated by one or more blank lines. (A blank line is any line that looks like a blank line -- a line containing nothing but spaces or tabs is considered blank.) Normal paragraphs should not be indented with spaces or tabs.
The implication of the "one or more consecutive lines of text" rule is
that Markdown supports "hard-wrapped" text paragraphs. This differs
significantly from most other text-to-HTML formatters (including Movable
Type's "Convert Line Breaks" option) which translate every line break
character in a paragraph into a <br /> tag.
When you do want to insert a <br /> break tag using Markdown, you
end a line with two or more spaces, then type return.
Yes, this takes a tad more effort to create a <br />, but a simplistic
"every line break is a <br />" rule wouldn't work for Markdown.
Markdown's email-style blockquoting and multi-paragraph list items
work best -- and look better -- when you format them with hard breaks.