[DanielG]

If you're looking for a simple all-in-one conversion tool, then take a look at ConvertXtoDVD. You can download a trial version from: http://www.vso-software.fr/products/convert_x_to_dvd/ to see if it suits your needs. ConvertXToDVD automatically detects the aspect ratio (either 16:9 or 4:3) so you shouldn't have any issues with stretched videos. Depending on the quality of the original DivX/XviD then the reduction in quality shouldn't be too much (of course this depends on how much video you put onto a DVD)

If you want to have more control over the MPEG2 encoding, then you should look into a specialized encoder. There are a number of MPEG2 encoders on the market with TMPGEnc being one of the more popular.
TMPGEnc DVD Author 3 with DivX® Authoring allows you to encode your AVI as well as author menus and chapter points.
http://tmpgenc.pegasys-inc.com/en/download/tda3.html

In both cases, I would recommend getting a software DVD player so that you can check your final output before burning to a disc. Your computer probably came with one (look for WinDVD or PowerDVD) but if it didn't there's a fantastic multimedia player which also plays DVDs called VideoLAN (VLC). It can be downloaded from: http://www.videolan.org/vlc/