After rendering to an avi file I had noticed that the newly edited clips were very blocky. The Sony knowledgebase suggested that I adjust the bitrate, which makes sense. Except the manual and online help doesn't appear to show how to do that.
What template did you use? Did you adjust anything?
Try doing a short render of a section of your project- like 10 seconds and try again.
If it is still blocky, try a different setting under the avi template.
Selecting the "AVI" option is only part of the story. You have to select the correct AVI template. In the Render As dialog, there are a dozen AVI templates. If you are in the US, you want one of the NTSC templates, usually the NTSC DV template is the one to use (or the widescreen template, if you shot in widescreen). In Europe, use PAL.
Try going to Preferences/General and seeing if 'Ignore Third Party Codecs' is ticked.
If it isn't then this may be the problem.
I had the same 'blocky' results some 18 months ago when I made some changes to this setting to see if it would help me render compatible AVI's for After Effects 4.0. In the end it didn't but all of my rendered AVIs turned out blocky until I went back to preferences and ticked this setting.