The PAL or NTSC will depend on where you are. It's different in in some countries to others. If you are in UK choose PAL, or for USA choose NTSC. Anywhere else, look on google if you're not sure.
If you want to edit the capture and have the disc space, go for AVI, edit and then encode to MPEG.
Experiment with a short clip of 5 mins or so with each, ie. AVI then encode and again with direct to MPEG and see if there is a difference.
I am assuming you are going to make a DVD from the videos by the way. I hope this helps get you started.