The more professional authoring apps out there require separate streams.
I don't know the reason why.
The flickering will happen regardless of your bitrate which determines
your disc data size. Usually the flickering is caused when part of
the image is less than 2 pixels tall. This makes it flicker because
of the interlacing scan lines alternating between on line and the other.
The flickering and moire patterns can be reduced by either having a
slightly larger picture to show or applying a very slight gaussian
The reason separate files are preferred is that the authoring program has to take the m2v and wav/ac3 files, add in metadata and chapter info, and then multiplex them into vob files. If the files are already together in one mpg file, the authoring program has to de-multiplex it to the separate files anyways.