Phil's Rambling Rants
The end tag for LI is an XHTMLism. Under HTML 4.0, you probably shouldn't have them. Indeed, I think under some people's journal styles, the end tag will render as yet another newline.
One of the options you should have available for posts is to disable LJ's formatting via checking "disable auto formatting". However, at that point, you're completely responsible for encapsulating your content with paragraph and line break tags.
I've largely just taken to putting all list stuff in a single line and that bypasses the problem. I suspect you could get some similar behavior without doing that cramming by overriding the CSS via a style attribute for the list. If you're interested enough, I'll dig through the CSS2 specs.