DVDs are 480i or 576i (at 60 or 50 fields per second). But they can store progressive 480p or 576p content (at 30/24 or 25 frames per second), and have some special flags and handling to do so.
Progressive output from the player is super for progressive film content if you have a progressive display, but if it's interlaced TV/video content then interlaced output will be the native form, and is what you'd want for accurate rendition if you have an interlace-capable display.
But if you've got one of those dodgy new flat-panel screens that can't do interlace, it's going to have to get deinterlaced at some point, so it's a question of finding the bit of kit with the best deinterlacer - the DVD player, the receiver or the display. The DVD player has a bit more info to go on because it can see the DVD flags, so in theory it could do a better job. In practice there are other quality factors - it'll tend to be the newest/most expensive bit of kit. So if it's a cheap DVD player connected to an expensive display/receiver, first try having the display or receiver do the deinterlacing and have interlaced output from the DVD. And vice versa.