Poor Quality - Pixellation

Hi All
Just started using Premiere Pro CS5.  (Used CS3 before with SD video). Getting poor quality playback on program monitor when playing timeline footage.
My new camera is a Panasonic AG-HMC81E
Record Format is AVCHD HA mode 1080/50i 17 mbps (vbr)
Recording media is SDHC Card 16GB Class 10
I copied the files from the card to my hard disk.  Files are mpeg (.MTS files)
PC Specs
Windows 7 - 64 bit
4 GB Ram
Graphics - NVidea Geforce 7300 LE 128mb DDR3
Processor - Twin Intel core 2 cpu 6300 1.86 ghz
Hard Disks - 3 on Raid 0
Premiere Project settings are for HDV and mercury engine is grayed out (i know i need a better graphics card for this to work)
General
Editing mode: AVCHD 1080i anamorphic
Timebase: 25.00fps
Video Settings
Frame size: 1440h 1080v (1.3333)
Frame rate: 25.00 frames/second
Pixel Aspect Ratio: HD Anamorphic 1080 (1.333)
Fields: Upper Field First
Audio Settings
Sample rate: 48000 samples/second
Video looks great direct feed from camera to TV via HDMI cable, but looks very poor playing from timeline.
Can anyone see where i'm going wrong here?
Wrong settings?
Missing codec?
Any help would be greatly appreciated.
Thanks
Mike.

Hi All
Clip on timeline has yellow line above it.  After rendering it has green line above it and the quality is much improved.
Imported clip and tried MODIFY/INTERPRET FOOTAGE.
This says that my clips are SQUARE PIXELS.  I thought i should be using the 1080i anamorphic setting
as im shooting in 16/9 widescreen.
File Properties says
File Path: D:\AVCHD\BDMV\STREAM\00000.MTS
Type: MPEG Movie
File Size: 23.9 MB
Image Size: 1920 x 1080
Pixel Depth: 32
Frame Rate: 25.00
Source Audio Format: 48000 Hz - compressed - Stereo
Project Audio Format: 48000 Hz - 32 bit floating point - Stereo
Total Duration: 00:00:12:12
Average Data Rate: 1.9 MB / second
Pixel Aspect Ratio: 1.0
Sorry to keep asking, and not trying to sound silly, but am i using the correct project settings for this file type.
I'm currently using: -
Editing Mode - AVCHD 1080i Square Pixel
Timebase - 25 frames
Frame size - 1920 X 1080 Widescreen 16 x 9
Pixel aspect ratio - Square pixels (1.0)
Fields - Upper field first
Video Previews
Preview - I-Frame only MPEG
Codec - MPEG I-Frame
Width - 1920
Hight - 1080
Thanks for all your help so far.
Perhaps poor quality is down to slow hardware as looks much better after rendering.
As long as i know i am using the correct settings i can update any hardware as required.
Mike Ward

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