This is only a guess, but it seems that there is something wrong with the GOP structure of the MPEG at that point.
There are several freeware DVD authoring programs, that run under Wn7, per this SEARCH. I have never used any, as I have Adobe Encore, but it is now only available as part of Premiere Pro.
If Ulead worked fine with that MPEG file, then it is either DVD-compliant, or Ulead is more lenient, than PrE is. Adobe softare is not that leniet, as the output is very strict. Some programs, not so much.
Other than possibly doing a Cut on either end of the Cross-Dissolve, and either leaving it as a Butt-cut, or shortening both scenes on either side of the removed Transition, and applying another, I cannot think of a way to "clean up" that portion of the MPEG.
Sorry, but good luck,
I tried one of the free authoring programs but the DVD output produced had the video and audio out of sync. I managed to do it using my trial version of Cyberlink PowerDirector. So Premiere is indeed very fussy about its input, as you said.
Depending on the source footage, I have found that some other programs do a better job of handling them. For that reason, I have CyberLink PowerDirector, and Magix MovieEdit Pro on my computer. Actually, since I use PrPro for most of my work, that is also why I bought and installed PrE - it handles footage well, that PrPro chokes on.
Personally, I am less comfortable actually editing in PowerDirector, or MovieEdit Pro (older versions of both), but PrE is closer to PrPro, so I rely on it as my "first step," and the other two NLE's more as just converters.
Still, if another tool in your video-editing toolbox, works better, there is zero shame in using it. Sometimes an adjustable spanner is all a mechanic needs, but when they require a universal socket with a "wobbly" extension on their Snap-On rachet, then the adjustable spanner goes back into the toolbox.
Most of all, I am glad that you are able to produce the desired results. That is what it's all about.
Thanks for reporting your workflow and your success. Good luck.