We develop the theory of light propagation under the conditions of electromagnetically induced transparency in systems involving strongly interacting Rydberg states. Taking into account the quantum nature and the spatial propagation of light, we analyze interactions involving few-photon pulses. We show that this system can be used for the generation of nonclassical states of light including trains of single photons with an avoided volume between them, for implementing photon-photon gates, as well as for studying many-body phenomena with strongly correlated photons.