Okay, I think I might have some answers in case anyone else needs them.
Crack open the .epub. Here's how: Make a COPY of the .epub first. Change the extension of that copy from .epub to .zip. Unzip said .zip. Find the .css and open it with a text editor. (Even if you didn't create one yourself, it's possible one was created upon conversion.) You can look at the indent rule Paul is talking about there. Then just open a random chapter in a text editor (not a word processor). Any chapter. It's probably, if it's a generated .epub, an .xhtml file in a folder possibly labeled OPS. What you are looking for is whether or not the paragraphs in your chapters have the proper paragraph class set out in the .css.
In your CSS, it will look like this:
(If you're using Calibre, CLASSNAME is probably changed to something like "c#" or "calibre#." If you didn't make a custom paragraph style in your original document, it might just be labeled "p" with nothing else, not even the period.)
(You'll want to see something about an indent here. I think it's "text-indent," but the code escapes me at the moment.)
EDIT: I just had to crack open a calibre file, and the stylesheet did not use "p" in the code. It just had the names. So .body, .calibre, .calibre1, etc. Still, you should see something with "text-indent" here if the CSS was created for your paragraph style.
In your chapter, it will look like this:
<p class="CLASSNAME">Content of first paragraph in your chapter.</p>
(If your CSS has no class name specified, your code will just start with <p>.)
Basically, you are first making sure that you actually have the code in your CSS defined. It is likely you have two CSS files if you used Calibre. But if you have it in there, then you need to make sure that your actual story knows to look for it. If your normal paragraphs aren't commanded via code to look at the CSS, then your problem is there.
Also, if you indented using paragraph styles, then the converter probably caught onto that and turned it into code. If you made a custom style, but didn't actually define it by saving it to the document, then maybe the code was attached to the body itself. In which case, you'll have a string of code after your <p> tag, but won't have "class" in there.
You should probably use CSS if there is no CSS available. I am not entirely sure of why myself, but when I was out and about looking at ebook formats, I discovered that certain software/readers would ignore a lot of code in the body of a novel, and so it was good to have a CSS reference as a back-up to account for those instances. Maybe that is what happened here. There is no stylesheeet, and the epub wants one, but the mobi didn't care because it could read what was in the body of your novel. (When I say "body," I mean in code terms. Anything that is between the opening and closing <body> tags is your novel.) Maybe the block paragraphs are the default of whatever software you are using, and the software is overriding the code in the body. CSS would be the only way to get around that.
You can fix it manually. This can get tricky, because after you code, you rezip the package a specific way, then turn that .zip file back into an .epub file before making sure it still passes the validator. There can be problems, depending on the OS and the method used. Simply renaming the .zip to .epub can toss up errors in ereading software if you have a specific OS. But you'll have to look that up. It's good to know where the problem lies though. If you insist on using your word processor to fix it, then make sure your styles are saved to the document (they should show up as a style to select). That should at least force the code into your .css.
Additionally, and this is just pure speculation on the other issue with .mobis - but is it possible that Amazon is looking for Calibre as a contributor and just rejecting the files? Anytime software is used to convert, the software name tends to get added into the meta somewhere as a contributor. Has anyone checked code between the working .mobis and non-working .mobis?