Nahh, I don't think the permanent conversion error or temporary conversion error is cause by file extension.
This error, is starting to happened at November 2009. The last time i heard from some rumor, is Megaupload is making a new implemented function like SMS service and that is consuming the remote upload bandwith and the conversion bandwith. That is why sometimes the converting process will failed.
But, it become worst and getting worst everyday.
I upload 50 avi files to megavideo and only 1-2 links is success. The rest is failed.
I think MU and MV must upgrade their server bandwith.