It looks like you're styling the blockquote, which is a block-level element (as the name would imply). If you wrap a <span> around the text and style it instead, you should get the results you're looking for.
If I can add to that. Jude is correct in saying the blockquote is block level, and unfortunately CMS's and blog engines have corrupted the original intention of it by styling it as inline in many cases. The correct inline quote is actually <quote> instead of <blockquote>.
I know that when we're creating templates for use by other users we want to style the blockquote, after all, that's what users have available to them when editing posts, what I would like to see is some additional manipulation by Serendipity of the blockquote button in the text editor, so that instead of simply wrapping a blockquote around it we actually wrap a div around it with a span so that we can really begin to style our quotes rather than have to force a solution into a single html tag which isn't designed to work the way we want to style it.
Considering how far we're pusing Serendipity with recent changes, I would say it might be about time to look into this as a possible permanent feature.
It would be nice to have both buttons, but the more we add, the more confused some users will become, and the more like a wysiwyg editor our little text editor will become. Somehow I don't think the developers will thank us for adding extra buttons, but it would be nice.