Here we go!
Most Divx/Xvid files are of near dvd quality to begin with, and are usually a single file, so there isn't any real loss of quality when re-encoding.
The best most simple, direct method of re-encoding to MPEG1/2 is to use TMPGEnc Plus, because there is no AVI(Divx/Xvid) standards having the proper codecs installed can be an issure. Keep in mind just because you might be able to play an AVI doesn't mean the proper codec is installed for re-encoding. You could have a filter installed instead that would allow lets say WMP to view it. Unless you are familiar with the codec that was used to encode your AVI file, run it through Gspot to see if you have the proper codec installed.
The next thing it to optimize TMPGEnc, by prioritizing your VFAPI plugins, if you have the following this is there order:
Directshow multimedia file reader - priority 3
Avisynth/VirtualDub Script reader - priority 3
AVI2 (Open DML0 file reaer - priorty 1
BMP/PPM file reader - priority -2
DVD2AVI project file reader 1.76 (or whatever ver) - priority -2
TMPGEnc project file reader - priority -2
All others are left at there respective default of '0'
Because as I mentioned earlier most AVI file types are of DVD quality the only settings I make sure of is to uncheck everything in the "other settings, advanced tab" and check under the "Video arrange method" "Full screen (maintain aspect ratio)"
I pick 80min (vcd/svcd) and raise the cd size to 99%.
Now that that's out the way, it has been my experience that because of various codecs used in AVI's, that even after a successful re-encode using TMPGEnc that when you go to split your MPEG (VCD.SVCD only, not DVD MPEG) that TMPGEnc may freeze/hang, so what I do with my AVI is split it before re-encoding it. I use Easy Video Splitter, easy simple to use, it has both manual and automatic settings.
Once the AVI file is split I then re-encode and wind up with two cd VCD/SVCD's ready to burn using Nero.
No need to split anything if you are going to re-encode to a DVD compliant MPEG2. Pegasus makes TMPGEnc DVD Author which is an excellent easy to use authoring app. It will take your DVD compliant MPEG2 and create VOB files. You can even auto chapter with time intervals you can set.
I use to use Nero to burn my dvd's (I still use it to burn my VCD/SVCD's) however IMHO CloneDVD does a far better job. But no worries TMPGEnc DVD Author also has a built-in burner ;-).
But I would highly recommend using CloneDVD.