Don’t judge it by viewing it the computer screen. You are watching interlaced footage on a non interlaced screen, watch it on a interlaced screen to judge it.
You say you have FCP 5.1 but not DVD SP, FCP only comes in the Final Cut Studio bundle that includes DVD SP.
I NEVER let DVD SP do the encode (or iDVD for that matter) the results are never as good as running the video through compressor first, I I don’t know if iDVD will accept compressed files from compressor though.