[popcornmix]

I ended up giving up on deinterlacing completely. It seems the DVDPlayer gives no video just audio when deinterlacing is enabled on all of my mpeg-2 videos. Looking back through this thread I can see other people have had this issue. I can also say that using OMXPlayer there are still issues with deinterlacing enabled. The audio drops out randomly and the screen blinks black for a second.

It could be a memory bandwidth issue. Increasing sdram_freq or core_freq may help.
You could also try increasing the display's memory priority. Add to config.txt

Code:

hvs_priority=0x32ff

I saw a previous post where popcorn mix recommended increasing the gpu_mem to 256 for a 512MB Pi. I have this setting already so I'm not sure how else to work around this. It seems with the new gpu hardware acceleration there is some sort of limitation being reached on the Pi. Could it be that even more gpu_mem is needed? Can I safely go above 256MB?

Yes, you can try going higher. Evenetually you may find the arm runs out of memory, but give 320 or even 352 a go.