UVD can help with decoding HD video, but decoding Blu-Ray still needs the CPU to handle some processing. The HD 3650 had an early version of the UVD so offloading / decoding blu-ray not as well optimized as more recent Radeons. Your CPU is much too slow to decode Blu-ray which generally requires a dual core CPU.
I recall seeing a benchmark of a Pentium 4 3.0GHz and a Radeon HD 3xxx or 4xxx graphics card struggling to play a blu-ray movie. The CPU load on the CPU was at least 80%.