When I render to a video file from Vegas 7, there is a sunset scene fading out to black that exhibits a lot of color banding. They are mainly around the glow of the sun into the sky. The weird thing is when the project is on the vegas timeline, and I scroll around, my external preview monitor (a regular computer CRT monitor) doesn't show this banding at all.

I have tried exporting the video out to many different formats including Cineform 2.5, xvid, wmv9, etc. Also I have tried using Debugmode Frameserver to serve to an avisynth file, and encoded the video into xvid in virtualdub... all with the same banding artifacts. I have also played around with the rendering settings in Vegas, setting all of them to "best" where I could.

My source files are m2t converted to cineform 2.5 (the one built into vegas 7).

Ok, I just realized most of the banding is visible only when playing the output video file on my lcd (which isn't a very good one). When I play it on my CRT, the banding is greatly reduced. However, there is still a little more banding than when playing back directly from the timeline. Is this just an unavoidable result from generational loss?

Is this just an unavoidable result from generational loss?

Unfortunately it is :-(
Extreme examples of this are when shows on satellite (maybe cable too) fade to/from black.
Depending on the transmission bandwidth, the blockiness can be extremely bad.

It is not generation loss so much, it is much more related to 8-bit banding -- there are just not enough levels in 8-bit data to smoothly present 8-bit gradients. In version 3.x CineForm codecs we bump the data to 10-bit before compression, then dither back to 8-bit for presentation for applications like Vegas, this helps a lot. For data that you already compressed, you have simulate dithering by injecting 0.05% noise (about one 1 bit of noise), but it will not work as well doing it after 8-bit compression. You can get some of higher quality using NEO Player which upgrade your Sony CineForm license to v3 for free, or even more benefits by purchasing NEO HDV/HD which gives you much more quality controls.