The PRE workflow is (1) Create your project (2) import your assets (3) sequence and edit your assets (4) create your menus (5) share your project.
The quality of intended output has no effect on your project settings which should match your source footage. Done this way optimises PRE's performance - as it can internally process far more effectively when matched to a 'native' format.
For standard definition the ideal format for PRE is DV-AVI Type 2. This is almost lossless and operates at around 13GB per hour.
Compression to an output format (e.g. DVD, or an iPod, or viewing online) is managed through the share process.
- Import your footage - e.g AVCHD, HDV, DV-AVI, VOB
- Share it to a compressed format - e.g. MP4
- Delete the original capture source (in Step 1)
- Work in a new project using the compressed output (in step 2).
But if you do this your final output quality will be lessened through working with a compressed original that you will then compress again. I can't see what you feel you will gain by this - disk space is so cheap now why wouldn't you want to give yourself the best quality source to work with.
Note that once you are finished with a project you can archive it off to free up your disk space.
Insanity is hereditary, you get it from your children