I asked 3r1c (the developer of MKV2VOB) the exact same question and he told me that converting to .MPG just changes the file extension, it does not decrease quality using .MPG only improves the compatibility of the file if playing on the Playstation 3 (quicker to fast forward/rewind).
Interesting. So the quality doesn't decrease for audio either? I think I've encoded something from .mkv to .mpg and it went from 5.1 channels to 2.