I cannot reproduce the bug on 1.4.2 or on more recent versions of SMW, but I think your analysis might be correct: if a(n XML) file stars with empty lines, then Firefox will not recognize it properly.

The problem can be caused by any extension that you installed. A typical cause for this issue is that some extension has .php files that include empty lines after a closing "?>" tag. For this reason, PHP files should never include this closing tag (this also applies to LocalSettings.php), but some extensions may not obey this guideline. You can try disabling extensions or see if your LocalSettings.php has a closing "?>" tag at the end to narrow down the cause of the problem. If this problem occurs, you will also typically find that Firefox does not display the RDF export of SMW properly (try Special:ExportRDF to check this).

In any case, I do not think that SMW has anything to do with your problem.Unfortunately, due to the nature of PHP processing, it is not possible for SMW to delete empty lines/spaces that have been created by faulty code elsewhere.