Your problem is not with iDVD.
There is a regresssion in quality of the image between iMovie 06 and iMovie 08 through 11.
The difference is the single field processing used by iMovie 09 and 11 (for faster editing) and the fact that it throws out every other horizontal line.
Final Cut Express and Adobe Premiere Elements 9 will give full quality but are more complicated to use.
In my opinion iMovie 06 with iDVD 09 or iDVD 11 is way to go. VERY easy and 100% "lossless".
I use and LIKE both iMovie 11 and iMovie 06, but for making DVDs iMovie 06 always looks better to me. (FCE will also give you full quality but is a lot harder to use.)
How to get the best quality (with) iDVD
Edit movie with iMovie 06 or Final Cut Express. Use iDVD 08-11 and set to "Professional Quality"