My opinion is that - mkv is a newer superior container compared to avi, but because it's newer it's less supported, you can do many things with mkv including integrated softsub - however if no mkv features are used avi should be used only for compatibility reasons. You CANNOT
properly put h264 - the superior codec - in avi. Well... you can but it's an ugly hack and hacks in the eye of the developers - a big headache.
I recommend
SUPER, a free piece of video/audio converter. You can convert the video to mpeg2 directly - suitable for putting in the DVD ( make sure you use the flv_2_DVD profile which comes with it - it doesn't matter if the input is not flv )