This is because you cannot simply rename a file's extension to "look like" a different format. An .mkv is as similar to an .avi as a goat is to an iguana. First, you may want to try something like this.
You can also try opening your MKV in VirtualDub (without renaming it ".avi"), which may work. I have read that recent releases of VirtualDub can handle (more or less) MKV files, but I have no experience with this myself. If this works, you can save it as an AVI from VirtualDub.
As for the AVI format, it is really just a "container." What matters more is the codec with which the AVI is compressed. A good choice is often DV (and here is a good free DV codec if you need one). However, DV only works with videos of certain resolution and framerate, so you may want to convert to an uncompressed AVI or use a codec like Lagarith.
Assuming you are able to find a decent MKV -> AVI converter, could you please post more details on your video, such as its resolution. It would also be helpful to know what format you plan to output your edited video as.
It's not at all likely that the file size is an issue. PrPro will handle files of almost any size, limited only by your system's ability to also handle them on its end.
Dan makes all the necessary points regarding your file and how best to get it "prepped" for Import.
I've never had to deal with MKV files, so do not know if my go-to media converter, DigitalMedia Converter, will handle these. I'd definitely look into doing the conversion (not chopping these files up) in VirtualDub first. If that does not work, there is a trial version of DMC, that might be worth a look. OTOH, it might refuse to work with an MKV file. You also might find info HERE.