The Inter-line Smoothing Threshold causes small groups of equal lines between two changes to be marked as part of one combined change. Inter-line smoothing can be thought of as “clumping” nearby changes into a single change.
In the following, when the smoothing is set to 0 (disabled), we see 2 changes:
When the smoothing is set to 3 or more, we see that they have been combined into 1 change that includes the identical lines between them:
This feature is initially set to 0 (disabled) because in File Merge Windows this smoothing can cause adjacent changes (such as in the above example) to be considered a conflict when the individual (unclumped) changes would not be. When you increase the threshold, you increase the likelihood that Auto-Merge will require manual follow-up. This may or may not be a good thing -- it's somewhat questionable how far apart nearby changes should be to be considered independent changes. By increasing the setting to 1 or 2, you may produce a few conflicts that will cause Auto-Merge to complain, but these are areas that you probably want to examine anyway.
Also, you might use this feature to reduce the number of annoying little changes reported. For example, in source code a function frequently consists of several lines of text, a blank line, several lines of text, a blank line, and so on. If someone inserts or changes a big chunk of code, the blank lines can sync up and the unrelated chunks of code can appear as a sequence of little changes. Setting the threshold to 1 should cause these individual changes to appear as 1 large change rather than numerous (annoying) little ones.
This field is used in both Detail Levels.