syk2c11,
I have the exact same problem (dancing dark-green blocks on black areas, visible on both monitor and TV) woth all kvcd templates.
I thought it was the "price to pay" in order to fit a movie on one single CD!! Not so high price, because on most movies, it is not so bothering (actually most "normal" viewers don't spot these blocks; by "normal" I mean people that did not sharpen their eyes with hours of MPEG encoding
)
For dark movies (eg. escape from NY) I usually
check "Output data as basic Y...." to get rid of them, at the cost of a darker imager, and a larger file size.
My chain is DVD2AVI (1.76)->FitCD->AviSynth->TMPGEnc.
Reading your post, I understand the problem comes from either Avisynth or MPEG2DEC.
Kwag are you using Avisynth 2.05 too?