The original size of the AVI is irrelevant to the size of the finished MPG. It all depends on how long IN TIME the original AVI was. If it was a 60-70 min movie/episode then yes, 2.5 to 3 gig is all you will get as the bitrate is maximized to the 9000 you would have entered in the Bitrate tab of DVD2SVCD. However, it it was a "normal" 100min avi, then you have not entered the correct data in the Bitrate or Audio tabs. Double check what you used there.
Also, what version of DVD2SVCD are you running? If not 1.2.1 b3 then I would suggest you install it.