Hi seaspray07,
"I was trying to encode AVCHD directly onto BluRay using Encore, but I cannot combine AVCHD with 5.1 audio with AVCHD with stereo tracks."
AVCHD isn't a valid codec for video bluray - you have to use MPEG2 or H.264 with Bluray compliant profile settings. Adobe Media Encoder has special presets for that.
"Are you recommending that I make a PrPro sequence with 5.1 master audio, drop the AVCHD source files into the timeline (i.e. AVCHD files containing stereo and AVCHD files containing 5.1 audio), and then export this sequence from PrPro to Adobe Media Encoder?"
Correct - that would be the way to go. But you have to check how it sounds if you intercut 5.1 with stereo - if that doesn't sounds good you have to conform the export to stereo to get a consistent mix... but that's a creative decision - technically you can mix it.
"Also, what would best the appropriate export settings for the m4v files (H.264 or MPEG-2)"
Adobe Media Encoder has special MPEG2 Bluray and H.264 Bluray encode settings to render Bluray compliant data.
H.264 Bluray would be the higher quality option for sure...