However, if you must force a 4x3, then I'd set both your project properties that way (4x3, and you should then see the letterboxing in the preview) and render that way (in 4x3). It is also possible in Vegas, and not too hard, to create a pan-and-scan 4x3 (basically you automate a 4x3 cropped frame right and left inside your source widescreen) version from your widescreen master.
I think if you set the project properties as 4:3, isn't it going to squeeze the video? I've left the properties set for wide screen and used the second method you described (Vegas even has a 4:3 preset in the pan/crop function window), and rendered an mpeg that was a perfect 4:3.
It takes a while longer to render the mpeg, but that's about the only difference I noticed.
Nah, you must have had something else set weird, like the pixel width, in order for that to happen -- or possibly Vegas couldn't recognize the pixel width of your clips. But, in general, if you drop widescreen clips into a 4x3 project timeline in Vegas, it'll just letterbox it perfectly for you instantly (and vise versa, aka pillar box). I've done this for years with Vegas. Of course previews will slow and so will rendering due to the resizing, but that's expected. That's not to say there may be times where using pan/crop is appropriate, but for something as simple as wanting a letterboxed 4x3 from widescreen, it should be as simple as changing the project settings. If not, you have something else going on, and if it stretches or compresses without letterboxing, that's nearly always a problem with how pixel width is set in the project or the events. But, like I said above, if the target is DVD, you should edit and render a widescreen DVD, and let the viewer's DVD player sort out whether to play it letterboxed or widescreen (just like a rented movie would work).