iMovie ONLY handles 720x480(NTSC) or 720x576(PAL) DV Streams, period.
You can convert other formats to this using QTPro but it's a long way round.
Everytime somebody asks for an inexpensive editor for the editing of Non-DV material, I recommend buying the Interex XLR8 Interview 2.0 which is a USB Video Capture Device that comes free with StrataStudio 4.5 DV which is excellent value for money at about $85. A lot less than buying full blown Premiere AND you get the USB Video Capture device that allows you to get analog video into your Mac withoug having to get a darn DV camcorder.
Also, MPEG's don't edit very well because of the nature of the compression. If you don't cut on an I-Frame you will get a glitch or just black frames for about half a dowen frames. Convert (Export) the mpeg material to MJPEG in Quicktime PRO and then cut the MJPEG material in Quicktime.
You know Quicktime itself is quite a powerful little editor itself when you get used to it. $29 for the Pro licence is well worth it and $20 on the Visual Quickstart Guide to QT4 Pro is money well spent!