Does this happen for New Account emails? And Order Status update emails? And send-gift-certificates emails?
Or is it strictly isolated to ONLY when checking out and paying by PayPal?
Have you tested by enabling the moneyorder payment module and selecting it during checkout, and see whether the order-confirmation emails are sent properly in that case?
If it's truly isolated only to when PayPal is used, then you've probably got the setting in your PayPal module for "Debug log to email" enabled, and you've specified an invalid Store Owner Email Address or Send From address in Admin->Configuration->Email Options, and it's failing when trying to send the debug log data.
Either way, make sure those email addresses are indeed correct, and don't contain extra spaces at the beginning or end, etc.
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