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I have had this too. Not sure PPRO supports mpg-files. You might have to convert to AVI with a converter.
Premiere Pro is not the best choice for editing consumer media. Look into Premiere Elements instead.
Have a read here: http://www.adobeforums.com/webx/.3bc46f4d/7
Most of the ins-n-outs are covered in that thread. See especially Eddie Lotter and John T Smith's comments with links. Follow those links and read some more.
I'm slowly finding out that PE doesn't do much more than PP with regards to many file formats. In some ways, it's a bit of a disappointment for me, as I had hoped to use it to bridge the occasional gap. Other, similar programs, like Pinnacle Studio, seem to be more lenient. I will not, however, go back to the "dark side" again.
Can't find the original but this is what it says:
If you've got Encore CS3 installed , copy the file ad2ac3dec.dll from
the Encore CS3 directory and paste it into the PPro CS3 root directory.
Once you restart CS3, you'll be able to import the file with the
audio. This means if you've already have a project with the files
imported, you'll need to remove the files from the project and
then re-import them, or just start over with a new project. Eddie
Ivan - you only need to post once http://www.adobeforums.com/webx/.59b5ab42