You normally break dialog up into separate paragraphs, but how are you supposed to format it when it's intermixed with non-dialog? Below is an example.
Is it correct to write the following exchange like so?:
"Hi," called a woman's voice.
John looked up from his work to see who it was. "Hello," he called back.
Or like so?:
"Hi," called a woman's voice.
John looked up from his work to see who it was.
"Hello," he called back.
Either is fine. Which you use is determined by the subtext you want to convey.
In your first example,
"Hi," called a woman's voice.
John looked up from his work to see who it was. "Hello," he called back.
John's action and reaction are immediate. This suggests any of these things: that he recognizes the woman, or finds she's attractive, and/or John is outgoing.
Your second example, with a line break between John's action and dialog:
"Hi," called a woman's voice.
John looked up from his work to see who it was.
"Hello," he called back.
implies an element of delay or pause. Does he recognize her, does he have to remember her, is he speculating if she is talking to him, maybe he hates her with the burning fury of a thousand suns.
In short, formatting of your story can have subtle influences on how people react to your story. The important word is subtle — meaning they may not get it and that is not their problem. It's a technique to sway peoples interpretations and nudge them in the direction you want them to go in to enjoy your story. That means it relies on the actual prose and dialog to have full effect.
And, a side note, using 'said' is a fine practice. It's the expected form. Readers know exactly what it means. That makes it transparent to an engaged reader. It's not needed with every piece of dialog. Once a pattern of two speakers is established, it's commonly dropped. But to avoid using 'said' because of a fetish is silly mindedness. The good writing possesses clarity and using said promotes clarity. That said, use it, don't use it, makes no never mind to me.
I use action all the time for speech attribution, instead of using "said."
Mary stopped at his open door. "Time for the meeting, professor."
John looked up, his reverie broken. "Oh! Is that now?"
He rose from his desk. "Um, I guess this will have to wait."
Mary smiled. "Come along, I've saved you seat."
Edit: I forgot to answer the question! So I don't think you have to break between the action and the dialogue; but you do need to break AFTER the dialogue and start a new paragraph. Which is what I have done above.
