Well, if it gives you any hope, I'm am using a virtually identical system, with the i52500K specifically. I am having no problems, and am editing Cannon XF, AVCHD, and DV material with no problem.
The .avi wrapper is no problem. What you want to do is look at is the codec employed. Proprietary distribution codecs often are not readily editable, needing either re-encoding or re-wrapping for editing.
Edit- suggestions... because this system should be working for you.
* I assume that the 1TB SATA drive is 7200rpm internal, that would be best. You will find a lot of users here that say that you need 2-3 drives dedicated for media, not in my experience.
The drive needs to be defragged often, and always keep it at least 20% free.
* You might try MXF OP1a for a intermediate codec instead of H.264, much easier on the cpu.
* Set Premiere's Media Cache Files folder to your media drive.
* Stick to the MPE accelerated fx when you can.
* Update Nvidia drivers.
"..With only 2 GB of footage in the timeline, the cache is over 40 GB (most of the files already being DELETED from the timeline). "Cleaning" the Cache does not remove the files, either."
It will be about the files in your project, not specifically the timeline. That said, 40gb seems inordinate, unless you have a huge amount of media in the project. Empty the Media Cache Files
folder while Premiere is closed.
Also, regarding your system drive, for what it is worth, at work we are using a 128GB SSD system drive for a CS6 system. This system is a bit buggier than the CS 5.X systems that I work with. The other systems all use Two 7200rpm sata drives in raid 0 for the C: drive.
My home system that is working so well with CS5.5
Core i52500k
16GB
GTX560 1GB
System Raid 0 Raptor10k 144GB
2TB Media drive
1.5TB external file storage
And lastly.... If you are working with CS5.5 and looking back at your FCP editing fondly, you have something really wrong going on that needs trouble shooting. The CS5.5 experience, especially when you have a system like yours with a GTX 560ti and 16gb memory, should blow the doors off the 32bit FCP 7 system. THE 64bit software and MPE hardware should provide a way better experience.
Good Luck.