I suggest you go & check out this site...
Go down to Tools,& look for a program called Tmpgenc,it's a freeware mpeg1 (VCD),encoder but the mpeg 2 is trial only. It's much better than Nero's built-in encoder. Better than that amongst your encoding options are 4:3 (what you're getting now), & 16:9 ratio (widescreen,what you're trying to retain).
Also check the video forum here,although that other link I showed gives you some great info too.
Hope it helps.