Yep, NTSC DV has 4:1:1 chroma subsampling. MPEG-2 (DVD) uses 4:2:0. If you don't do any post-processing before encoding, you end up with 4:1:0 (which results in those horrible big blocks in pure reds).

Incidentally, PAL DV is 4:2:0 so doesn't suffer from this problem.

I'm not sure why the chroma smoother is not helping. Perhaps another option is to use a different DV codec that interpolates the chroma on decoding.

Maybe one of our resident FCP gurus (Jambe Davdar, ocpmovie, MoveAlong) could help?