I have a very specific use for VLC - I use it to test my encodes and make sure they work perfectly. The reason is that if they play perfectly on VLC, they will most likely play perfectly everywhere else. What I'm saying is that VLC is the most likely player I have ever used to suffer from playback errors. VLC was the only player I tested which failed to properly play back an mpeg2 (.mpg program stream - very common and everything should play it perfectly these days). It also hurfs itself over any files I encode with x264 or mux to mkv.
I really can't recommend VLC for general playback use, especially when trying to play .mkv files with any sort of competence. I have to echo the previous suggestion of uninstalling all codec packs you have, using the latest CCCP (combined community codec pack) in conjunction with MPC-HC (included), and also installing the newest divx release (but don't use the divx player).
Just a note: One convention I go to appears to use VLC for the AMV contest, which means I have to make my videos work with the lowest common denominator. I'd bet it's not the only convention to do so. orz