One of the drawbacks of using the "Edit top 200 Rows" is that it is difficult to paste multiline blocks of text into a table.

The problem is that it halts at the first Carriage Return [CHAR(13)] that it finds. These are part of the CrLf that is inserted whenever you press the Return/Enter key. If the data is formatted with only Linefeeds [CHAR(10)], then it can paste just fine.

Can the Format SQL function be configured so that each CrLf is replaced with just a Lf as an option?

No, current formatter version is not capable for that but:
1.We use external formatter "as-is". It is called "Poor man SQL Formatter", which is open-source and hosted on github. You can add this feature yourself and then just replace .exe of the formatter, so your version will be used
2.We plan some kind of "find and replace" feature with possibility to save most common replacements. This might solve your issue. Planned within next 2 releases.