In order to edit "DVD" files, you have to extract the files back to the most basic form, proper audio, video (and maybe others like subtitles).
This guide on this site will help with that process:
http://www.digitalfaq.com/edit/recor...corderedit.htm
The reason you cannot rename a VOB as an MPG is because they are NOT the same thing. While a VOB contains MPEG video, it is not an MPEG file alone inside. A VOB is a container that holds other files too.
Now on to the second half of the question...
What you want is pretty much impossible. It's not the nature of the technology. A DVD is a final product. It was not meant to be edited or altered in any way. The VOB is what contains the NAV info (chapters, etc), not the MPEG. An authoring program is built to accept proper video/audio/sub/etc files, add menus/nav (as needed) and then create a disc. It is not meant to edit a disc.
Consider this analogy (using silverware)...
You have a spoon, but want to "edit" it to turn it into a fork. But their exist no conversion machine to input spoon, and then receive a fork as the output. If you want that spoon to become a fork, you must melt it down (extract back to base materials), and the re-cast it into a fork.
Hope that helps.
There are some exceptions to note:
A JVC DVD recorder, as are many other DVD recorders, do a simple audio/video mux into VOB. Those are essentially the same as an MPEG. I use a JVC hre, edit the video files in Womble MPEG-VCR, and then dump into DVDWS2 for authoring. I am not sure if JVC's "editing" of the files would affect this, as I never use a DVD recorder to edit. I use the PC. Also, be sure to enable all the "remove" options in
DVD Decrypter, as shown in the guide.