Spaces in filenames can be tough. The first thing I would try is to not escape the spaces - spaces need to be escaped in shell, but not in Ruby strings. So try this:
blog.sources = "entries/{year}-{month}-{day} - {title}"
Once you've done that, upgrade to middleman-blog 3.5+ - handling of spaces was a bug that's been fixed.
(Edited to reflect the status of the bug fix)