Many NLE software such as Premiere 6.5 are pretty good converting AVI to MPG format. But those software are expensive and take up lots of your system's resources. In other words, they are s-l-o-w in converting videos.
I recommend a free software called TMPGenc which I'm using now for making Mpeg1 videos. The pro version (which extends the conversion capability to Mpeg2) is not free though. Here is their official site:
<A HREF="http://www.tmpgenc.net/e_main.html" target="_new">http://www.tmpgenc.net/e_main.html</A>
And this web page will guide you through step-by-step on using TMPGenc:
<A HREF="http://www.dvdrhelp.com/tmpgenc.htm" target="_new">http://www.dvdrhelp.com/tmpgenc.htm</A>
Actually this same site provides lots of other helpful info on video conversions.
<A HREF="http://www.dvdrhelp.com/convert" target="_new">http://www.dvdrhelp.com/convert</A>
Good luck and have fun.