There are several Color Correction Effects in PrPro CS3. Which one did you use? If it was Auto (anything), do not use that. Unless one's footage is perfectly the same for the entire Clip, you will likely get "pulsing," or similar.
Also, what is your source footage? That can have some effect on how some of the Effects perform.
I believe it was auto.
What color correction filter should be used?
The souce is mpg2, I know its not the best source to edit in, but its what I have today.
Depends on the footage.
Screendump will help.
If you have it, use Color Finesse.
You are correct that MPEG-2 is not the best source material, but sometimes one has to use what is handed to them.
I like the Fast Color Corrector for most color work. Often, the Color Balance (quite limited), will be good enough, though not that often - depends on the scene. The Three-Way Color Corrector is even better, but does require a bit more work with the settings.
I'd give Fast Color Corrector a run. Do not hesitate to experiment with it, observing what it's providing you with. I find it very useful.
PS - I find the Auto (anything) to be pretty useless. About the same with the Auto Adjustments in Photoshop.
PPS - I normally do any Levels (not Auto Levels), and maybe Shadow & Highlight Effects BEFORE I use Fast Color Corrector. I'll then go back and tweak Levels and maybe S & H.