I used to convert my .mkv files awelll. Problem is you lose your ability to do anything with them afterwards. A .mkv is like a .zip file it has extra audio tracks, subs etc in it, in a raw "untouched" format (original encoding setting when ripped from the disk).
When it is converted to a .mpg you lose all that. It's like printing a word documet to paper, what you have on paper is usable but not as good as the orriginal (you can't make any changes).
Use PS3 Media Server. It converts .mkv to .mpg as you play it over the network and does not touch the orriginal files.
um i only need 1 video, 1 audio and 1 subtitle track for my files, compatibility is more important to me because I have multiple devices all running off a central NAS where my media is and when im copying media to portable devices I dont like to have to transcode or remux my files again.
its not just the ps3 that doesnt play mkv's, compatibility is generally poor all round thats why i convert them. If it was just the ps3 i'd just stream them apart from the bloated filesizes for additional audio tracks i'm never going to use.