I think Movie Maker only uses DirectShow codecs. Are you able to play the avi at all? What program are you using to play it? And biggest of all, what codec does the file use? Use a tool like gspot, avicodec, or mediainfo to find out what codec(s) the video uses.
Yes, you should make sure you can play the video before importing WMM. if it can’t play very well, you’d better use this youtube tool to download and convert the video.
Hope it can help you.
I suggest you use software to download YouTube video, for it is more stable and safe. I recommend this free YouTube Downloader software. You can use it to download and convert YouTube videos.