What you can do is to open Links.ascx (DesktopModules\Links\Links.ascx). Then, you look for a table tag, change cellpadding value. I think the default vaule is 4px. I changed mine to 0. Hope this helps.

I had a similar problem with a horizontal menu. What worked for me was deleting   from Desktopmodules/Links/links.ascx in the following code

<asp:HyperLink CssClass="Normal" Text='<%# DataBinder.Eval(Container.DataItem,"Title") %>' NavigateUrl='<%# formatURL(DataBinder.Eval(Container.DataItem,"Url"),DataBinder.Eval(Container.DataItem,"TrackClicks")) %>' ToolTip='<%# DisplayToolTip(DataBinder.Eval(Container.DataItem,"Description")) %>' Target= '<%# IIF(DataBinder.Eval(Container.DataItem,"NewWindow"),"_blank","_self") %>' runat="server" />
&nbsp;
<asp:linkbutton Runat="server" CssClass="CommandButton" Text='...' CommandName="Select" Visible='<%# DisplayInfo() %>'/>