MKV2VOB will lose a crap load of quality and defeats the purpose IMO. I use PS3Muxer to convert HD MKV files and it will split it into 4gb parts and can be stored on a fat32 hdd and played directly from the xmb or you can leave it as a large file and stream it easily using WMP11. Luckily my bought me a blue ray player that supports mkv files firstly and streams them via wiring without a hiccup. Saw one once on my conversion of Inception as it was around 23gb 1080p file and only happened in the first thirty seconds. When hooked up with LAN it is flawless.
PS3 CECH-2501A [CFW] & CECH-3001 [OFW]/ PS2 SCPH-3901 & SCPH-7501/ PS1 SCPH-5501
Mod Cobra 4.46 v7.00 w/ E3 Flasher [CFW] & Cobra ODE 4.50 [OFW]/ Mod HDD-OSD [Phat] & Modbo 4.0 [Slim]/ Mod MM3
HDD 1tb [CFW] & 640gb [OFW]/ HDD 640gb & OPL v0.92 w/ 1.5tb SMB