This can be solved to an extent by the "invisible text area"[1] trick. Here, whatever text is inputted or pasted goes directly to an invisible text area. And from that it is appended to the CE div/iframe that's is shown to the user. I think Cloud9IDE[2] uses this technique.

That and the way every browser reacts to the enter key press. Firefox appends <BR>, Chrome appends <Div> and IE[3] appends <P>.

[1] I don't know where I read about this. Sorry.

[2] http://cloud9ide.com/

[3] The IE behavior is similar to MS Word.