The neatest way would be to use an AviSynth script with MPEG2Source(). Install AviSynth, and get the DGMPGDec plugin. Run DGIndex, open your M2V file, and save a D2V index file. Now in notepad, type the following:

LoadPlugin("pathname\DGDecode.dll")
MPEG2Source("filename.d2v")

Save with the extension .avs. Hopefully Vegas should be able to open this as if it were an AVI file.

Failing that, you could use VirtualDub-MPEG2 to load the M2V, and save out as an AVI. Use a lossless codec like huffyuv or Lagarith - but you will still need a fair amount of drive space.