I agree, using the video from the AVCHD and putting it in a different container will give far better results than re-encoding.
Also, I saw reference earlier to transcode settings that would downmix the 5.1 audio into stereo with Prologic II matrixing, which made my head hurt. The surrounds in the 5.1 are already phase-shifted as it is, which makes for less-than-ideal sound quality when downmixed again, owing to the way it was made. I tried to minimize this as much as possible, but putting additional phase-shifting on top of what is already there will most likely sound even more weird. I strongly recommend using the actual stereo mixes instead, and leaving the 5.1 for listening on an actual 5.1 system. The results will be much better.
I don’t know if I would say “far” better. If you re-encode properly with a good program like Handbrake the differences really won’t be that noticeable, if at all. Especially if you’re encoding for a smaller screen such as a portable device. And if you want to make a smaller file than 7GB or so regardless, you’re better off just encoding from the MKV. Considering how high a bitrate it is (overkill for most practical purposes), it really isn’t a big deal.
Though I agree that it makes no sense to down mix the 5.1 to Pro Logic when perfectly good stereo tracks are available and you may as well just apply the Pro Logic option on your receiver to the stereo track if you have a 5.1 system and for some reason aren’t using the actual 5.1 track anyway.