but will try to provide more detail - and ask some questions.
Your "Panasonic HD camcorder"... what model?
The video quality setting in the camcorder is set to high quality, low quality or what in-between?
What was used to do the conversion from MTS to AVI files? AVI files are basically just an envelop with a video format media file inside. There can be high quality, low compression, large file size AVI files or low quality, high compression, small file size AVI files. Your post sounds like the latter. I am not aware of any DVD players that can play AVI files.
My "normal" process flow dealing with MTS (or TOD) files from a consumer grade AVCHD camcorder:
Connect the camcorder to the computer with a USB cable.
Put the camcorder into Play or PC mode.
Use a video editor or other application to import the video. This step is usually done with a video editor that is AVCHD-capable. This uses the camcorder's processing to decompress the MTS/TOD files to a format the computer's video editor can deal with.
(Because this import/decompression step happens ere, there is not transcoder requirement. The video files are huge - around 44 gig per hour of video editor useful video will be consumed on the importing computer's hard disc drive.)
Edit the video. Export the final project to a low compression, high quality video that the DVD authoring application can deal with. Quit the video editor. Launch the DVD authoring application.
Bring the low compression, high quality video that was just rendered into the DVD authoring application. Set up some options, scene selections, etc... burn the video to a DVD. The DVD authoring tool will take care of the VOB file rendering.
In the event the video is copied from the camcorder to the computer, something is needed to "translate" (convert, transcode) the MTS/TOD files to something useful. All the processing is done by the computer and appropriate formats should be used. As with in the camcorder, high compression = small file size and lower video quality. When transcoding in the computer, the same rule applies... remember the converse: low compression, large file size, better video quality.
In my opinion, assuming the MTS files were decent quality, they should be fine downstream, assuming the amount of compression of video at each step along the ay is minimal (and the original capture was done at highest quality).
Once the video is compressed a lot at one of the "intermediate" steps, that because the lowest common denominator and sets the bar on video quality.
Now, consider what you want to do... let us assume that you recorded the video at best quality. Then you copied the MTS file into the computer, converted the files to AVI (most likely with high compression to keep the file size small), then the DVD authoring tool decompressed the video so it could work with it, then compressed the video even more because VOB files are what regular DVD players can deal with.
In the Windows environment, the current version of MovieMaker may be able to deal with importing video from AVCHD camcorders. MyDVD and lots of others can render the DVD to be played in the regular DVD player. If you need to transcode, I like HandBrake from www.handbrake.fr - since you told us nothing about your computer hardware, operating system or applications, we do not know if you are in an AVCHD-capable environment.
For Apple Macintosh, this "process flow" has been available with the bundled iMovie and iDVD.
In either case, we assume the computer has enough RAM and available hard drive space to deal with AVCHD-compressed video and meets (better yet, exceeds) the requirements for dealing with AVCHD-compressed video.
The camcorder manufacturers have done a poor job of supporting consumers with ways to deal with high definition video captured by flash memory and hard disc drive camcorders...