Ok guys, I've been tinkering all night with this and I'm pretty sure I've sorted the HD playback.
Download XenonMKV and put your MKV files through that. It took 10 minutes with my i3 530 processor to output a 3.5gb 720p MP4 file that plays absolutely flawlessly through AVPlayerHD. This file is the one that was ridiculously choppy as an MKV file, now it's smooth as could be.
I figure a 10gb 1080p MKV would take around 25-30 minutes to output a perfect MP4 file on my PC. Certainly a lot better than the 6-7 hours it seems to take currently.
Give it a try and leave your feedback, hopefully this is the solution.
Edit - Just tried it with a 10gb 1080p MKV and it still only took 10 minutes! It works too. This was one of the files stuck at 0:00 with no video earlier, so looks like this is the way to go.