Do you normally divide paragraphs with a line between them or with indents and no lines?
Generally, I use indents except when I'm writing online; if the work is to be assessed or submitted anywhere, they basically always specify that they want indents and 1.5 or double line spacing, and with indents I find that the gaps don't look too big. Do you have any formatting specifications that could tell you what they want? Either that, or just bring it up with whoever's in charge that the line breaks seem really large.
I'm not fond of big gaps between lines in character speech myself. Even if it's technically correct, I don't like having all that blank space on the page and I don't feel like it's comfortable to read. I should mention, however, that I don't mind 1.5 lines nearly as much as double line spacing, which I've often been required to use.
This brings me to a huge point you need to consider: why are you being asked to use that line spacing? If it's just so whoever you're sending it to can edit it easily (like :devstar-blazer mentioned) then you don't need to worry. If it's because it'll actually be printed/published that way, it might be worth bringing it up with whoever you're sending them to. But usually I'd trust anybody putting a book together to know what will and won't look good.
The only important thing is that you use just one hard return between each paragraph, whether it is one line or twenty. Then you can use whatever indents or line spacing you want by changing paragraph styles.
I would personally say that it's all up to personal preference when writing. My documents are usually set to the default setting in Word when I work since it makes me more comfortable. If you don't like THAT much space, maybe tweak some of the settings more to get it to look a little better in your document so that you feel comfortable typing it.
If you're concerned about the proper spacing for publishing, it also depends on the publisher. Some like the work double spaced when they read it, some single spaced, some 1.5, etc. They usually will have specifics on their guidelines. (Most I've seen usually ask for double spaced).