PS3 won't play MKV, yoru choice for HD containers are MP4 or M2TS.... MP4 is picky as hell...... M2TS is easy to make work.
DTS is also a no go when streaming/playing from a container... it will need to be AC3 or MP3, convert the 5.1 DTS track to 640kbps AC3 using eac3to
I use mencoder to convert VC1 to h264, it's very reliable and i always end up with a PS3 compatible stream with teh command line i use.
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