Whenever I've had to encode to WMV I've found the free Windows Media Encoder from Microsoft to be more capable than the interface in Vegas. On the upside WME lets you control every parameter independantly, on the downside you need to render out of Vegas first as say AVI and then work your way through a quite bewildering array of encoding parameters.
found the problem.. it only happens when I downscale from the camera to an avi (PAL Wide, 723x576) what happens is when I render directly to wmv using the default template, it will select "kepp original size" and turn out squashed.. pretty strange to me!
it is ok when I render an m2t directly using the custom template. It will turn out 16:9.
So I checked the settings n discovered... the pixel aspect ratio was set to '1.000 Square' by default! Just choose the '1.333 (HD1080)' and its solved! Same filesize but 16:9.. no more 'squashed' look!