bhairav, ps3 has native support for h264/mpeg4/avc video for playing 1080p.. although .mkv is not supported.. so since mkv is still the choice format for HD media, you'd still have to re-encode whatever stuff you downloaded before the ps3 will play it..
i've tried installing yellow dog linux + VLC onto my ps3 before, in the hope that it would be able to play all 1080p files, but found it was stuttering very badly... so in the end, as far as home theatre is concerned, the ps3 is only good for blu-ray media
forget abt transcoding solutions like TVersity, NeroHome etc. they do fine for normal divx/xvid stuff, but anything above 720p doesn't transcode well...
bottom line: nothing works better than a dedicated HTPC