I don't know where you got your movies from, but it is better to convert them for use in third party software before dropping them into iTunes. It is actually illegal to convert a DVD or other copyrighted material, and Apple don't really support you doing it (but they are glad you do).
The ipod fully supports the mp3 format.
AVI is proprietary format owned by Microsoft. Apple are committed to open source formats. mp3 is actually very old hat and the format they use is open source mp4 with digital rights management (anti-copying) on it at the insistance of the people who license them to sell the music (the record companies).