links won't open in separate window

Have you tried changing theme? Try switching to Twenty Twelve and then insert a link to open a new window.
If that works, then your theme is overwriting that function.

The topic of opening links in a new window has been debated Ad nauseam. Some people think it’s great, others don’t. I’m in the camp that thinks that your visitors can’t be forced to stay on any site.

Here’s an interesting article – http://uxdesign.smashingmagazine.com/2008/07/01/should-links-open-in-new-windows/