How do you make a paragraph indent within a table?

Around line ends/beginnings, LaTeX swallows spaces. To force these spaces to stay in place, use \hspace*{<length>}:

\ctable[
  cap= A short caption,
  caption= This is a longer caption,
  ]{lp{2in}p{2in}}{}{\FL
  title1 & title2 & title3\ML
  label &
  \hspace{1em} This is paragraph one.  This is paragraph one.\newline
  \hspace*{1em} This is paragraph two.  This is paragraph two.&
  \hspace{1em} This is paragraph one.  This is paragraph one.\newline
  \hspace*{1em} This is paragraph two.  This is paragraph two.\NN
  label2 &
  \hspace{1em} This is paragraph one.  This is paragraph one.\newline
  \hspace*{1em} This is paragraph two.  This is paragraph two.&
  \hspace{1em} This is paragraph one.  This is paragraph one.\newline
  \hspace*{1em} This is paragraph two.  This is paragraph two.\LL
  }

Another alternative stems from the fact the paragraph indentation is removed within tables since their typesetting may be somewhat different from that of regular text. Consequently, setting \parindent to the appropriate value within \ctable should do the trick:

...
\setlength{\parindent}{1em}This is ... \endgraf &
\setlength{\parindent}{1em}This is ... \endgraf \\
...

However, you have to use \endgraf in order to terminate paragraphs together with the \setlength command here since neither \par nor \newline would help.

Use the \endgraf macro -- it works the same way as \par, but is also allowed in places where \par isn't. (Thanks to egreg for the tip.)

\documentclass{article}

\usepackage{ctable}
\newcolumntype{q}[1]{>{\setlength{\parindent}{1em}}p{#1}}

\begin{document}

\ctable[
    cap= A short caption,
    caption= This is a longer caption,
    ]{lq{2in}q{2in}}{}{\FL
    title1 & title2 & title3\ML
    label &
    This is paragraph one.  This is paragraph one.\endgraf
    This is paragraph two.  This is paragraph two.&
    This is paragraph one.  This is paragraph one.\endgraf
    This is paragraph two.  This is paragraph two.\NN
    label2 &
    This is paragraph one.  This is paragraph one.\endgraf
    This is paragraph two.  This is paragraph two.&
    This is paragraph one.  This is paragraph one.\endgraf
    This is paragraph two.  This is paragraph two.\LL
    }

\end{document}