diff --git a/flow/compiler.js b/flow/compiler.js
index a5f3304de52..316ff65e44b 100644
--- a/flow/compiler.js
+++ b/flow/compiler.js
@@ -7,6 +7,7 @@ declare type CompilerOptions = {
   canBeLeftOpenTag?: (tag: string) => ?boolean; // check if a tag can be left opened
   isReservedTag?: (tag: string) => ?boolean; // check if a tag is a native for the platform
   preserveWhitespace?: boolean; // preserve whitespace between elements?
+  removeWhitespace?: string; // how to deal with whitespace between elements?
   optimize?: boolean; // optimize static content?
 
   // web specific
diff --git a/src/compiler/parser/index.js b/src/compiler/parser/index.js
index 9428cf75e3b..c9433181b7c 100644
--- a/src/compiler/parser/index.js
+++ b/src/compiler/parser/index.js
@@ -29,6 +29,8 @@ const argRE = /:(.*)$/
 export const bindRE = /^:|^v-bind:/
 const modifierRE = /\.[^.]+/g
 
+const lineBreakRE = /^[\s\r\n]*\n+[\s\r\n]*|[\s\r\n]*\n+[\s\r\n]*$/g
+
 const decodeHTMLCached = cached(he.decode)
 
 // configurable state
@@ -79,6 +81,9 @@ export function parse (
 
   const stack = []
   const preserveWhitespace = options.preserveWhitespace !== false
+  // with-line-break
+  const removeWhitespace = options.removeWhitespace || (preserveWhitespace ? 'none' : 'all')
+
   let root
   let currentParent
   let inVPre = false
@@ -258,11 +263,16 @@ export function parse (
         return
       }
       const children = currentParent.children
-      text = inPre || text.trim()
-        ? isTextTag(currentParent) ? text : decodeHTMLCached(text)
+      if (inPre || text.trim()) {
+        text = isTextTag(currentParent) ? text : decodeHTMLCached(text)
+      } else {
         // only preserve whitespace if its not right after a starting tag
-        : preserveWhitespace && children.length ? ' ' : ''
+        text = (removeWhitespace !== 'all') && children.length ? ' ' : ''
+      }
       if (text) {
+        if (removeWhitespace === 'with-line-break') {
+          text = text.replace(lineBreakRE, '')
+        }
         let res
         if (!inVPre && text !== ' ' && (res = parseText(text, delimiters))) {
           children.push({
diff --git a/test/unit/modules/compiler/parser.spec.js b/test/unit/modules/compiler/parser.spec.js
index efa5daf4eb3..da5e0f9001c 100644
--- a/test/unit/modules/compiler/parser.spec.js
+++ b/test/unit/modules/compiler/parser.spec.js
@@ -757,4 +757,81 @@ describe('parser', () => {
     const ast = parse(`<p>{{\r\nmsg\r\n}}</p>`, baseOptions)
     expect(ast.children[0].expression).toBe('_s(msg)')
   })
+
+  it('should remove whitespaces correctly with `preserveWhitespace: false`', () => {
+    const options = extend({
+      preserveWhitespace: false
+    }, baseOptions)
+
+    const ast = parse('<p>\n  Welcome to <b>Vue.js</b> <i>world</i>.\n  Have fun!\n</p>', options)
+    expect(ast.tag).toBe('p')
+    expect(ast.children.length).toBe(4)
+    expect(ast.children[0].type).toBe(3)
+    expect(ast.children[0].text).toBe('\n  Welcome to ')
+    expect(ast.children[1].tag).toBe('b')
+    expect(ast.children[1].children[0].text).toBe('Vue.js')
+    expect(ast.children[2].tag).toBe('i')
+    expect(ast.children[2].children[0].text).toBe('world')
+    expect(ast.children[3].type).toBe(3)
+    expect(ast.children[3].text).toBe('.\n  Have fun!\n')
+  })
+
+  it('should remove whitespaces correctly with `removeWhitespace: \'with-line-break\'`', () => {
+    const options = extend({
+      removeWhitespace: 'with-line-break'
+    }, baseOptions)
+
+    const ast = parse('<p>\n  Welcome to <b>Vue.js</b> <i>world</i>.\n  Have fun!\n</p>', options)
+    expect(ast.tag).toBe('p')
+    expect(ast.children.length).toBe(5)
+    expect(ast.children[0].type).toBe(3)
+    expect(ast.children[0].text).toBe('Welcome to ')
+    expect(ast.children[1].tag).toBe('b')
+    expect(ast.children[1].children[0].text).toBe('Vue.js')
+    expect(ast.children[2].type).toBe(3)
+    expect(ast.children[2].text).toBe(' ')
+    expect(ast.children[3].tag).toBe('i')
+    expect(ast.children[3].children[0].text).toBe('world')
+    expect(ast.children[4].type).toBe(3)
+    expect(ast.children[4].text).toBe('.\n  Have fun!')
+  })
+
+  it('should remove whitespaces correctly with `removeWhitespace: \'all\'`', () => {
+    const options = extend({
+      removeWhitespace: 'all'
+    }, baseOptions)
+
+    const ast = parse('<p>\n  Welcome to <b>Vue.js</b> <i>world</i>.\n  Have fun!\n</p>', options)
+    expect(ast.tag).toBe('p')
+    expect(ast.children.length).toBe(4)
+    expect(ast.children[0].type).toBe(3)
+    expect(ast.children[0].text).toBe('\n  Welcome to ')
+    expect(ast.children[1].tag).toBe('b')
+    expect(ast.children[1].children[0].text).toBe('Vue.js')
+    expect(ast.children[2].tag).toBe('i')
+    expect(ast.children[2].children[0].text).toBe('world')
+    expect(ast.children[3].type).toBe(3)
+    expect(ast.children[3].text).toBe('.\n  Have fun!\n')
+  })
+
+  it('should ignore `preserveWhitespace: false` if `removeWhitespace` is specified', () => {
+    const options = extend({
+      removeWhitespace: 'with-line-break',
+      preserveWhitespace: false
+    }, baseOptions)
+
+    const ast = parse('<p>\n  Welcome to <b>Vue.js</b> <i>world</i>.\n  Have fun!\n</p>', options)
+    expect(ast.tag).toBe('p')
+    expect(ast.children.length).toBe(5)
+    expect(ast.children[0].type).toBe(3)
+    expect(ast.children[0].text).toBe('Welcome to ')
+    expect(ast.children[1].tag).toBe('b')
+    expect(ast.children[1].children[0].text).toBe('Vue.js')
+    expect(ast.children[2].type).toBe(3)
+    expect(ast.children[2].text).toBe(' ')
+    expect(ast.children[3].tag).toBe('i')
+    expect(ast.children[3].children[0].text).toBe('world')
+    expect(ast.children[4].type).toBe(3)
+    expect(ast.children[4].text).toBe('.\n  Have fun!')
+  })
 })