So I had the whole thing wrong - and this question has taught me a lot about paste. As cuonglm correctly notes, unless you paste an in file in -serial, you'll always wind up w/ the last \newline from your infile list being appended to the output as it is written. I was mistaken in the belief that paste -s behavior was its default mode - and this is a misconception which, apparently busybox paste was happy to reinforce. The following command does work as advertised w/ busybox:
paste -d'| ' /dev/null- - infile </dev/null infile >outfile
It does not work according to spec, though. A correctly implemented paste would still append a trailing \newline for each sequence written. Still, that's no big deal after all:
n=/dev/null; paste -d\ "$n"- infile "$n"|- </dev/null | paste -sd\| - >outfile