mpeg and avi are both container formats. Mpeg system streams are more advanced than the crappy ancient video-for-windows (vfw) engine that avi is built on, in that they can handle vbr audio, multiple b-frames, and other nifties like that.
As far as codecs go, mpeg 1 and mpeg 2 are the only ones available for the common .mpg extension (mpeg system stream). Mpeg 4 has it's own extension and format based largely on quicktime (.mp4). It was microsoft's genius idea to release half-assed implementations of the then new mpeg 4 standard in vfw format as msmpeg1, 2, and eventually 3. They got the ball rolling (in the wrong direction) for mpeg 4 in avi. Avi itself can contain any codec that has a vfw interface and any audio codec with an acm (audio codec manager). Avi sucks though in that single b-frames are a hack, multiple b-frames are impossible, vbr mp3 is a hack, vbr anything else is pretty much impossible, the entire file is needed to begin playback so streaming avi is impossible, the overhead tends to be huge, and other such nuances.
/lesson
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