Your profile says you are using Snow Leopard (10.6.8) and a Canon camcorder that records to SD memory cards (probably AVCHD video, right?) You should go with FCE 4 for both reasons.
FCE 3.5 would be ok on Tiger or Leopard. And the only HD format it works with is HDV. No SD card camcorder that I know of records to HDV. Most of them are AVCHD. And you need FCE 4 for AVCHD video.
MPEG4-AVC/H.264 and AVCHD derive from the same family of standards but they are not necessarily the same. It depends on how the camcorder manufacturer implemented the choices available in the standards. Look for the AVCHD logo on your camera & manual; if it's there, you have an AVCHD camcorder.
FCE 4 supports AVCHD but FCE 3.5 does not. Also, FCE 4 is fine on both Leopard (10.5.x) and Snow Leopard (10.6.x). I have it running on both versions of OS X, and it works flawlessly.