MKV stands for Matroska Video, which is a open source, open standard Multimedia container.
The word container itself gives you some idea of what it is.
Xbox 360 does not specifically block video from playing based on a maximum bit rate, resolution, or frames per second. If you want to play a 5.1-channel video on your console, you will need to encode it to WMV with WMAPro 5.1 audio or use the AVI container with Dolby® Digital 5.1 audio.
Don’t worry, you read it all right here, and since you are scratching your head, let me put all things together.
Before proceeding further, it’s important to understand MKV files.
Please note that some people have had success with playing back standard resolution MOV (Quick Time) and certain high resolution MOV (Quick Time HD) files directly without further re-encoding, so you might want to try this first.
Quick Time HD files are already encoded using H.264, but some are encoded using settings which are incompatible with the Xbox 360's H.264 support.