I'm not sure why the top of the screen flickers. I've noticed the same thing in PP 1.5 after applying certain effects. The only way I've found to get rid of this is to click on the preview monitor and expand the clip very slightly so it crops the outer edge off the image.
If you want video for web pages, a smaller file size than AVI can be achieved by exporting it as WMV. I don't know the exact procedure on your version of Premiere, but if you sellect Adobe Media Enoder you should see various options, including various Windows Media Video quality settings.