I may be wrong but oldfart might have meant to say "encoded" instead of compressed? (not really different but since you seemed confused about the compression part)
You can use TMPGEnc to convert an .avi file to a vcd format that can play in your stand-alone dvd player. Better yet, if you want to retain the high quality, I suggest you convert it to svcd (as long as your dvd player supports svcd - not many Sony can do it but Pioneer or other brands have no problem - check the site oldfart linked for a list of dvd players that can handle svcd files).
I use Cinema Craft which results in very high quality and is the fastest but it's pretty expensive (TMPGEnc is free). The reason Nero's converted file is too big is probably because the default settings in Nero is set too high (i.e., bit rate, sound options, etc.). You can adjust the settings according to your preference to fit the entire file in one CD. 634mb of AVI sounds like an easy task to fit in one CD while retaining the quality of original video and audio.