The Canon ZR850 has both USB and Firewire video outputs. Since you are using a PC my question is "How are you exporting the DV video? Are you using Firewire or USB?" Many PCs do not have a Firewire card, and most cameras only come with USB cables, so right from the start, it's two strikes. USB is not really capable of exporting full DV video data, so it may be defaulting to the 320X240 size. Use the USB cable only for downloading still images that you take with the camcorder or use it on your Canon digital still camera.
Regarding file size, a properly downloaded DV movie will use about 13megs per hour. Your "large" file size may be caused by your editing program converting your small mpeg 320X240 movie into an AVI movie file for editing (which is about as large as a comparable DV file).
What do you mean your DVD player can't play MPEG? All DVD movies are MPEG, so if what you say is true, you couldn't play a commercial DVD. But, do you mean that your MPEG movie is a small 320X240 movie? If so, then it's not a video MPEG, it's a data MPEG and it is probably a smaller WMV or Quicktime-type file. Either of these won't play in a DVD player but will play in a computer.
I am new to video editing so please bear with me if my questions appear trivial. I own a Canon SD100 and a ZR850. I can shoot movies with my camera on 320x240 and even on 640x480. However it seems that my camcorder cannot shoot higher than 320x240. I thought that miniDV had a much higher resolution. Is the Canon limited to a low video resolution? Is it the same thing with similar cameras?
Anyway, second problem, when I transfer to my computer I can create nice wmv files. When I convert to AVI, the size of the files become unbearably huge. My DVD player cannot read mpeg so I prefer AVI. Is there an explanation why with my camcorder movies (15m 320x240) generate huge AVI files? I used ULead Video Studio to convert files from wmv to AVI.