Actually, what is happening probably has nothing to do with
object. Make a double space before and after your blockquote code and it should work and validate fine.
What is happening, probably, is that there is a tag getting in the way. We've had reports of this. Get rid of the object and test again with double spaces before and after (or even three spaces sometimes works), and if that doesn't work, try putting the paragraph above and below in paragraph tags like this:
<blockquote>say something clever</blockquote>
<p>Paragraph two goes on and on...</p>
And see if that validates. If either of these work, it's not the object tag you have to worry about. It's WordPress trying to read your mind...well, at least your code, and figure out what you are doing. We're trying to find a better fix for this.