This is something I recently tried to do, and although there are some people claiming that it's easy, I haven't found that to be the case.
If you've got a MPEG4 file, QT of course has no problem with it. MPEG2 might work if you have the QT plugin, but that costs money from Apple.
As for MPEG1 (generally .mpg files), Quicktime sort of supports them; it plays muxed MPEG1 (that is, MPEG1 with the audio and video tracks mixed together--the standard format) just fine. And, Quicktime knows how to read and export both MPEG1 video, and MPEG1 audio (usually .mp2 or .mp3 audio files--those are actually just layers of MPEG1 audio).
Unfortunately, QT does not, so far as I can tell, properly export muxed MPEG1 files--it'll give you the video with no audio, or vice versa.
You can demux an MPEG1 file using another program, though, and then recombine the video and audio in QT Player (pro version), then export that. You could also theoretically have a non-muxed MPEG1 file, but I don't think it would be standard--it'd actually be a Quicktime (.mov) or AVI container with MPEG1 audio and video tracks.
Getting back to iMovie, I iMovie 4 (which uses QT for everything, so none of this is surprising) definitely won't import a muxed MPEG1 file--it just returns an error. You can open the .mpg in QT Player, export to a DV stream (it'll probably look awful, but that's not QT's fault--just low resolution like ftaok said), then have iMovie import that (or put it in the media folder and have it automatically add it to the clips pane). I've tried the same with iMovie 2 and 3, and it didn't work with those, either, nor would I expect it to until (unless) Apple decides to add full muxed MPEG1 support to Quicktime.
Now, if somebody else has figured out a way to get iMovie to properly import .mpg files with both video and sound, I'd love to hear it, but it sure didn't work for me. Horrortaxi--are you sure what you got iMovie to import was really a valid MPEG1 muxed video, and not a video-only stream or something with the wrong file extension on it?