Always use Dolby stereo. The files you downld will always be in stereo.

2 pass is much better than 1 pass but takes twice as long.

Ok with Nero 6, it's divx codecs might not be as good as nero 7's, due to the newer version divx codecs, & other added codecs including audio. But I might be wrong.

Leave interlaced at default. Depends whether you're using ntsc or pal, video source also is related (eg: from a cam.)
That's more of a ntsc issue. I use pal where I am.

Sleepless will prolly know "much" more about burning with nero than me. I don't often burn videos I've downlded. I burn full quality vids.