FWIW, I just edited a dance recital video and used the "interpolate" setting (Vegas 6). The results were very pleasing. Also, I've been experimenting with 60i -> 30p conversion (just to see what happens) on some of the dances, and the final non-interlaced frames look terrific (to my eye).
IMHO one should use one or the other of the settings. The default is not very helpful for anything other than proofing.
You have to set your project to "progressive" for the de-interlace to have any effect. If your end result is a DVD (played on a TV) then don't de-interlace. Live with it the way it looks. It'll look fine on your TV because your TV is interlaced.
If you're going to a PC format, like quicktime or Windows Media, then de-interlace you project. And ALWAYS use interpolate.
Actually Vegas doesn't have a de-interlacer as such.
Interpolate means ditch every second field (and half the vertical resolution along with it). Blend means just merge the two fields and suffer the interlace artifacts. No intelligence is applied, no motion compensation is employed as is used in real de-interlacers.
That's not to put a downer on Vegas. In many situations one of those two methods will be more than adequate and to do anything better does involve a lot of CPU power.
For example if you've shot HDV at 1080i and need to deliver 720p then your source has double the vertical resolution of your output so using Interpolate and loosing half the vertical res isn't an issue.
Also there's a free Vegas de-interlacer that combines both methods and does a pretty decent job. Moving beyond that cost and complexity goes up.