Hrm, ok, I can recommend another method that works well for me.
It's a version of virtualdub that can handle .mpg and .mkv files.
If you haven't worked with virtualdub, it's one of the main programs for converting
something to divx (or some other) AVI.
So, you open your mkv file. Do video --> compression --> choose divx with your desired settings.
Then do streams --> stream list --> right click on the audio track listed there --> full processing mode --> right click again --> compression. Choose your favorite audio compression and settings.
[OPTIONAL]: If your file needs to be cropped to a certain size or aspect ratio, do ctrl+F to get to the filters.
Then do add --> choose "resize" from the list --> put in the new size settings and click ok, then ok to the filters box.
Finally, do file --> save as --> and you can save as an AVI.
If it gives errors or crashes... there is one more thing to try. It may or may not work depending on the mkv file.
It forces virtualdubmod to process the file in a different way that might works better.
You must have FFDshow installed. There are different versions of it but this is a safe bet: http://downloads.sourceforge.net/ffdshow-tryout/ffdshow_beta5_rev2033_20080705_clsid.exe
Now create a text file. Copy and paste this into it:
example: directshowsource("C:\Dot Hack Sign 1-28+Extras\[V-A]_hack_SIGN_-_10_[2898C734].mkv")
Save the file, close it, and rename it to whatever.avs
Now go back to virtualdubmod, open that .avs file you created. It should think for a second and then open the video file.
If you don't get any errors here, you're home free. Now just do all the steps above for changing compression settings, then file -> save as AVI, and it should work.