Ok After getting the final mpg file of size 554 mb (original avi file 700 mb )when i try to burn it using nero it says i need to encode again. Any Idea why?

because KVCD is not VCD (nor SVCD) standard. So you have to uncheck to box "do a compliant VCD" to tell to Nero that you don't want it to reencode the video.

Note: stop thinking the original size as the slightest interrest. The only info you give here is that you are doing a probable warez movie... if you see where I want to go...