If you open a book, almost any book of fiction, you'll find the first line indented and no spaces between paragraphs. As far as I know, that's the "official" formatting for a book of fiction. Non fiction, like essays and such, should have no line indent and spacing between paragraphs. Or at least that's what I've been told is the proper formatting.
I myself, however, love the combination of both - paragraph spacing and indenting, I find it more readable (and books are actually formatted like that in my country). It all depends what's it for. If it's a book that'll be paper published in English, I think you would have to go with indent and no space. If you're self-publishing on Smashwords, their style guide DEMANDS indent and no space for fiction, and space and no indent for non-fiction. If you're posting it online, then I think going with both line spacing and indent would be best, we all hate reading big walls of text online - but only if the indenting is handled by the web page itself - putting, for example, four spaces on every first line in my post here just to have it look indented would be ridiculous. I wouldn't gain anything with that, and also, plain HTML removes extra white spaces, so it wouldn't even work. If you were to make a PDF document, however, then a combination of line spaces and indents would be doable.
Just to add, don't ever handle the formatting by adding spaces or tabs and empty lines. If you edit it in word processor and export it to PDF, for example, use Paragraph settings to set the spacing between paragraphs and line indenting. If you post it online, use CSS styles. This way you can easily change it when ever you want, without having to delete extra lines or tabs and spaces. Unless you're posting fiction on sites like Wattpad or DeaviantArt, where you can't choose your own styles, then you don't have a choice. If you don't put a paragraph spaces when posting on DeviantArt, it will look like one big wall of text and odds are people won't read it solely because of that. Walls of texts are scary ;) (Wattpad automatically puts paragraph spaces, so it doesn't leave you much choice. Most sites go for paragraph spaces without indents because it's the easiest way to display writing online, indenting is rarely done in CSS but paragraph spacing is easy.)