Use it in Vegas for still when panning. For normal DV video, you don't need it, although it may help in certain situations with slow motion. I think the only time to use it in DVDA is to help, once again, with still pictures, like those used for backgrounds. The problem it is designed to reduce is when you have a really thin almost-horizontal line that doesn't quite line up with a scan line, and the video shows it for one scan line, but not the other. This causes that annoying flicker around the edges of objects. Usually, you have to use additional measures beyond the reduce interlace flicker if you want to completely kill the flicker. There are hundreds of posts about this. Just search on "reduce interlace flicker" in this forum. I just did that and came up with 515 hits. If I add "DVDA" so as to focus just on your specific question, I still get 27 hits.
Somewhere in that thread someone mentioned the DVDA option for flicker was for menus only. However, I ran two copies of my project--one with and without the DVDA flicker option--and found a definite difference, on the mpg-2 files I inserted.
The double-flickered copy was quite blurry with regard to text.
The double-flickered copy was quite blurry with regard to text.
That is not surprising. Text is really difficult to render without flicker. That is why most professional text generators use "anti-aliasing" which introduces some intentional blur in the form of pixels that are between the chroma/luma value of the text and that of the background. The "clear type" option in Windows does exactly the same thing. I don't know whether the Vegas text generator has an option that does this, although a little drop shadow goes a long way to eliminating flicker.