The best conversion would be no conversion at all. 😉 Video for DVDs get converted to MPEG-2 no matter what (it's the DVD standard) so any additional conversions by you will just result in additional quality loss.
And so, your second question is related to the first. While your AVI videos are, in their original format, ~4 GB, they are converted to MPEG-2, which must be less efficient than your AVI codecs, so the filesizes get bigger. There's not a whole lot you can do about this in iDVD (besides not putting everything on one DVD). If you want to delve a bit deeper into compression, you could use Compressor with DVD Studio Pro to possibly squeeze all your video onto that one disc.