When you paste text that contains line ending characters into any pane of the diff window, everything is pasted into one line, making comparisons very difficult. This only happens under Mac OS X as far as I can tell (Windows version retains EOLs). kdiff3 Version 0.9.95, OS X 10.6.3. The line end style setting doesn't seem to have any effect.
Pasting works well in 0.9.97 for Mac - and any later version, I would assume.