in fact, DVDSP supports only MPEG-2, and comes with an MPEG-2 export component for quicktime pro (maybe iMovie too, but that's a long shot). When you export from iMovie with the iDVD setting, it exports to full frame DV (that's the codec within quicktime). For some reason that's beyond me, QuickTime's default setting is to play back DV media with the High Quality flag unchecked. You can set it with Quicktime Pro in the High Quality section of the Video Track in the Movie Properties pane. Even if you don't do this, it will look fine again after you let iDVD encode to MPEG-2 and burn (you never get to see the mpeg-2 file iDVD creates before it burns)
in short, don't worry about it. DV is never your final format, and when you do convert to your final format, it will look good again