If you want an alternative mpeg2 encoder, I suggest downloading the 14 day trial of TMPGenc Plus 2.5 found here.
The mpeg2 files will be larger than your avi. Especially if you make them the commonly used 720 x 576 (PAL).
You could make them half the size (resolution) if you like, and still be making dvd compliant mpeg2 files that you could import into DVDLab. PAL settings would be 25fps, 352 x 576. You can also reduce bitrate to shrink the size of the resulting mpeg files, but this will also cut into the quality of your video.
Another solution would be to author the original divx files to dvd using TMPGenc Author 3. There is a free trial available for it as well. Your dvd player would have to be able to play divx files though. Many of the newer dvd players have this capability.