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Character A is quoting characters B and C. Since character A is talking their words are enclosed in double quotes. Their rendition of characters B and C's speech is enclosed in single quotes. Should there be spacing as well for character B/C's? Example:

"Then he said 'I like apples,' said character B.

'I prefer oranges,' said C.

'But what about plums?' asked B.

and that's all they talked about"

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I definitely wouldn't write it the way you have in the question - that was really hard to figure out.

First off, I'd chose different words to make it clearer what's dialogue and what's narration. Then I think I'd break the section up with more narration. Something like:

X frowned at Y, clearly tired of the conversation already. "Fine. I'll say it once more. We were standing there on the sidewalk outside the grocery store, and B said, 'I like apples.' But you know C couldn't agree about the sky being blue, so he was all, 'I prefer oranges.'" X had made his voice deep and manly when repeating B's words, high and prissy for C's.

"But B's always got to try to make peace, right?" X waited for Y's nod of understanding, then continued. "So B said, 'Well, what about plums?' and I swear, they talked about fruit for another five minutes, at least."

Maybe you were just using a simplified version of the dialogue in order to ask the spacing question, in which case - no, I wouldn't use that spacing. But the larger answer I'd give would be to use more words to make it all more clear. Punctuation and spacing are important, but they can't work miracles.

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    Piling on. You could shorten and simplify this considerably by having A use indirect quotes, which sounds more natural. Example: "First B says he likes apples," said A. "Then C says he prefers oranges. Then B says, 'What about plums?' And that's all they talked about, the whole time!" /parag/ D laughed. "That's nuts." /parag/ "Oh my god, don't get them started on nuts." – dmm Aug 17 '15 at 14:57
  • Yeah, I agree, indirect quotes would absolutely make sense. I was assuming there was some good reason to need the direct quotes, but if there isn't? Indirect all the way! – Kate S. Aug 17 '15 at 15:04
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I'll assume the first three words (then he said) introduce A's speech. If so, move them outside the quotation marks and follow with a comma.

Then he said, "…"

If A's speech continues over multiple paragraphs, start each paragraph with double quotes to indicate the continuation:

Then he said, "'I like apples,' said character B.

"'I prefer oranges,' said C.

"'But what about plums?' asked B.

"And that's all they talked about."

Or you could write the whole passage as one paragraph:

Then he said, "'I like apples,' said character B. 'I prefer oranges,' said C.' But what about plums?' asked B. And that's all they talked about."

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