Since I will be upgrading to FCPHD next week, this is probably a moot issue, but I am nonetheless puzzled.

I had just completed the editing of a multi-cam live performance and was adding titles to the introduction when I noticed the display of those titles in the canvas were horribly pixelated (not just a little fuzzy) any time I pressed the space bar to start playback. The images were crisp in pause mode. I used a font style and size (Didot italic) in FCE's 3D titling feature I have used before..

The background image was a logo scanned at 200 dpi, then imported into a 720 x 534 image file, also at 200 dpi. Saved that as a psd file and imported into FCE. To verify, I exported the title sequence as a QT dv file and viewed it in both QT player set to high quality, then iMovie. Finally looked at the same sequence on my camera's lcd monitor. In all cases, the titles remained badly pixelated.

I then removed the psd file and made some new test titles over black. No change. Finally convinced that something was indeed not right I imported the entire project into iMovie and completed the titles there. They couldn't have the same look as originally intended, but at least they could be clearly read.

Has anyone encountered similar behavior?

I've used FCE and currently use FCP HD. There's a saying that applies to both..."Final Cut has a great titling tool. It's called PhotoShop."

I rarely use the built in titling tools in FCP. I use Photoshop and LiveType. Since you said you will be getting FCP HD next week, then you can use LiveType which is bundled with it. LiveType is very powerful and can be used for much more than just titling. I use it for motion graphics (http://www.daveperry.net/pages/indi_trailer_031805.shtml) as well.

There is good info at Ken Stone's web site (http://www.kenstone.net/fcp_homepage/livetype_fundamentals.html) on how to get started with LiveType.

If you haven't looked at the footage on a larger monitor or printed it for final viewing, try doing that. I have found, a lot of the garbage that FCE shows in the viewers are not what appear in final output.
If you are still having problems upon final output, my only suggestions would be to try making the font size a lot larger and then scaling them down with the parameters in the motion tab. Or, if you are scaling the text up any after setting the font size, don't do it!
If none of that works, try adding a copy of the title below the original, blur the original, and do a key of some kind (like multiply) and it may make things look better. Who knows... many solutions to many problems.
(Obvious stuff, I know, but sometimes you never know...)
In my experience, however, it's almost always the case that FCE just hates titles on the computer screen but loves them on a large monitor or final output.
Hope you figure your problem out, and if not enjoy FCE HD.
Later,
Nevin