Ive got a DAV550 plugged into AV3 mate on my FQ75 using a QED svideo lead and it works fine (no B&W)
However, to play SVCD and VCDs I had to go into the service menu to turn on NTSC support for AV3.
Are you using R2 dvds? As they should be fine as standard.
With regards to best way of connecting I got told from various sources (on here, hifi shops/web sites) that using a high quality svhs to scart lead is the best way of connecting (on a DAV system anyway)
Hope that helps