You need a graphics editing program and an animation program, like Paint Shop Pro and Animation Shop, or Photoshop and Image Ready, etc.
Open the mpeg in the animation program, then save the frames you want to use as an avatar to your computer. Open the saved frames up in your graphics editing program. Resize the frames to avatar size. Save them again. Create a new animation and use the new, resized frames from the movie.
Oh yeah, it s way hard to make an avatar under 35KB (or is it 34) that looks good out of movie frames. I tried to make an avatar out of Tony Hawk pulling off the 900. The file size is like 120KB.