First, the current version of iDVD should work fine with external DVD burners. So your best bet is to upgrade, either properly or not so properly.
Beyond that, I haven't worked a lot with buring disk images to video DVDs. If you mount the disk image, and if iDVD formatted it properly, you should be able to use Disk Utility to burn it to a DVD and have it work properly. Should is the key word there, however.
No matter what, though, if you're going to be doing DVD burning, especially with an external non-Apple drive, get yourself Toast Titanium. Almost everything you'll want to do burning wise can be done with Toast.
WARNING: This post may contain violent and disturbing images.
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