Paste multi-line text, and the tool collapses the line breaks into spaces (or joins everything into one line) so it reads as continuous text.
'Replace with space' keeps words separated; 'remove entirely' joins lines with no gap. Both collapse resulting double spaces.
All line breaks are treated the same. If you need to keep paragraphs, use the wrap/unwrap tools instead.
Yes — both \n and \r\n line endings are handled.