Not only are you downscaling resolution, you are going from progressive to interlaced. As long as you want it compatible with DVD players, there’s a limit to how much you can do.
One thing I would look at is re-capturing the footage for the DVD version with the computer set to a lower resolution; even as low as 640×480. Depending on the software, that may be an issue as well. It would also require a re-edit for the DVD version. But with reduced downscaling from the original, you may get a better result for DVD.
You’ll still have to endure the difference between progressive and interlaced, though.