How to format citations for proposals with a 5-page limit
As a writer of (and occasional reviewer of) applications following this format - UK BBSRC grants - the most common approach I see is 'glob everything together', although personally I prefer to use short-format Science-style references. It comes down to personal preference really. It is so common to use the 'glob' approach that you won't be explicitly penalised for it by a reviewer, but as a reviewer I might subliminally be 'happier' reviewing the more legible version. Admittedly you can't fit as many references in but I can't remember ever having seen any application which I was inclined to mark down because too few references were provided.

(Disclaimer: this is based entirely on experience with BBSRC, other RCUK councils may differ...)