Should I Use an AVR for 2-Channel Home Theater

Some do. Most don't. I agree with Meiwan and go the 2 channel integrated amp route.

First, your not really paying for extra channels in an AVR as most of the R&D and parts costs go into features like video processing, room correction, etc. Not amplification, either preamp or power amp. The built-in amps are generally low power with small, off the shelf power supplies. At least the mainstream AVR's definitely are. There are a few upper eschelon manufacturers of AVR's that will pay attention to quality amp sections but at these price points, you can get pretty high end integrated amps instead.

Since you don't need any of this stuff along with the extra low powered channels, look at a quality 2 channel integrated amp. Plus, many are now starting to come with built-in DAC's. The critically reviewed Harman Kardon even has bass management and sub outputs. If you want 2 channel, then buy quality 2 channel equipment that is designed for it.

drubin, you've cited some valid reasons for using an avr; some others might include ability to biamp or availability of features like an fm tuner, xm or internet connectivity. the main selling point is value--because of rapid technological enhancements avrs depreciate extremely quickly and consequently there are incredible used deals to be had. that said, i'd agree with the above posters that a 2 channel integrated will generally sound better than a comparable avr. however if you're looking for something for tv/video, as opposed to critical music listening, a used avr is a viable way to go. personally, i think b&k sounds very close to separates; harman kardon also makes very good sounding units.

All source components will downmix multichannel to PCM. The earlier the better in the chain. Both my blueray player and cable box do a great job, allowing me to output the digital signal via coax or toslink.

Sub management, if you need it, is best done on the sub, which has assorted controls for that purpose.

DAC quality varies a lot within all components, AVRs included. Any source DAC will likely equal an AVR DAC. If you want a good one, look to an outboard dac, unless you are considering the higher end integrated amps, such as from Moon or Bryston.