The exact problem is that a bug in ATI's driver swaps U and V color coordinates in YUV color space.
The forum thread about the problem suggests the following solution:
launch gstreamer-properties from terminal
change the video output plugin to custom
change the video output pipeline to:
ffmpegcolorspace ! video/x-raw-yuv,format=(fourcc)YV12 ! xvimagesink
Yet another problem with video playback I've been having is that some files will have a green band on top when played in VLC. I thought it was a deinterlacing problem since some deinterlace option changed the size of the green band. But There was an online discussion about this also. The fix is to change VLC preferences to use a differnt video output module. Using X11 video output module instead of the "Default" option got rid of the green band. As a bonus, this change also got rid of an artifact where fast-changing image would show that the video was being rendered in two steps triangles.
These problems counted two in the ever-shrinking list of reasons to have Windows around. Not many more left. I think I can safely delete my Windows partition soon.