Excel 2007 “Wrap Text” button won’t “de-wrap” certain cells

It is actually expected behavior (well expected by Microsoft, not necessarily by users) which is the good news. And there is a quite simple work around which is the even better news.

When you paste in a piece of formatted text the cell gets given the "Normal" style and then has the required formatting layered on top. The "Normal" style by default has protection set to locked. So this is why it is being applied.

The solution is to modify the "Normal" style. To replicate a solved version of this problem create a new workbook, then:

1) On the Home Ribbon in the Styles section right click on the Normal box and click Modify. Press the Format button and on the protection tab uncheck Locked. (Remember this only applies to this spreadsheet, but that all cells will now be unprotected rather than protected).

2) Select All cells, right click and choose format cells, and under protection check Locked.

3) Select A1 only, right click, choose format cells, and under protection uncheck locked.

4) Protect the worksheet

Now we should be back at the same point as the example in the question in terms of locked and unlocked cells but with a different Normal style.

Now when I paste text in from word or elsewhere the cell does not become protected.

I was able to reproduce the behavior you are seeing (also in Excel 2007). I can't find a way to get rid of the extra space once it's there, but I found that if you reverse your steps and apply the Text Wrap in a cell prior to entering your text, you will not get the extra blank line.