When I complete a defrag the graphic often shows large areas of free space, between blocks of data. I know this is only a graphical representation of the drive, but why doe it not close up the gaps?

Because consolidating free space is not really a function of defragging, which, technically, only deals with file fragments, not empty space. Also, there are a few critical files that Windows expects to find in specific locations - they are not movable, so the free space wraps around it.

As long as you have plenty of free space, I would not worry about it.

Yes, the windows defragmenters' algorithms do not seem to take into account the need for thorough free space consolidation so it's not the best in that aspect.

Note that free space consolidation has it's pros and cons, depending on how the specific defragmenter sequences and places files that are modified frequently.

For eg, I use the current version of Diskeeper 2009 Professional, which is a top-notch defragmenter (not free BTW). I leave it running in automatic defrag mode, and it consolidates free space very well. On some volumes, I noticed that it moves the 'static' files to the end of the disk leaving a large block of free space in the 'middle' of the disk to allow the other files to expand without much of a problem. Each defragger will have it's own idea of what's the 'right' layout...but I like Diskeeper's approach.