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I know very little about MPEG4 but I do make DVDs all the time. The DVD format is MPEG2. If your camcorder records in the MPEG4 format, it needs to be converted to MPEG2 for it to work in a DVD player. (Unless your player reads the MPEG4 format). Your Nero program is attempting to do that but compressing an already compressed file typically results in poor video quality. I don’t know of any application that will allow you to author a DVD in the MPEG4 format (but 1 may exist). Keep in mind that even if your player reads MPEG4 doesn’t mean everyones will.
It’s best to record in an uncompressed format. DV AVI is what I use. If your using DIVX, I’m guessing that is compressed, (but may be wrong). Probably not much help right now but if your camera can record straight DV, do it that way. Making DVDs is a long process, be patient. I wish I could offer more help.