Your settings seem ok. I always import the mts files straight into Vegas then render out to mpeg2, albeit in PAL format (thus, aspect ratio is different from NTSC, 1:457 as opposed to 1:212). The only other setting I change from yours is the Field Order, which I leave at Progressive. Either way, the results for DVD playback are good for me.
As previously mentioned, no need to change your settings for playback on a 4:3 TV, letterboxing or pan/scan would be normal, depending on settings used when authoring the DVD. There can sometimes be override options on the TV/DVD player, although I've never had any problems with this.
When you say your mpeg2 exports don't look so great, how do you mean?