Thanks for posting the file.
What you are seeing is the highlight layer (=1) being distorted as it’s converted into the correct format for button highlights. It’s jarring because you have fading opacity in the artwork of the highlight layer, and that’s being (unavoidably) crushed in the highlight conversion process.
In DVD-Video, button highlights are a 2 bit indexed graphical overlay. What this means in practical terms is that the artwork highlight layer cannot have more than one opacity, so no soft strokes such as you have, no drop shadows, glows etc…just full on pixels for the highlight layer.
Now if you want to avoid this limitation by not using highlight layers, you can get what you want from this button by creating multiple menus, and then switching to the next menu using the button auto-activate feature. Note that this will be a lot of work if you have multiple buttons and menus.