Can you embed one video inside another? I'm quite new to video editing so I like some advice on whether it is possible to embed one video inside another?

The kind of effect I'm aiming for is to have one video playing then have it pause whilst another smaller video pops out (like a caption I guess) which plays then disappears leaving the original 'background' video to continue to completion.  The clips are reasonably short at around 2-5 mins.  They are in various formats avi, mpeg xvid - all commonly used, however I expect to have to convert them all to the same format in order to do this.

What editing software (for windows) would I be able to do this in, if indeed it is possible!!  I am reasonably technical but I don't want anything too over the top, unless of course I'm not going to do this with anything simple!!

Thanks for your help.
I believe what you're looking for is an editor with basic picture-in-picture (PiP) capabilities. For full and total control (including getting the "background" video to pause), I'd recommend Adobe Premiere Pro. A lot of simple editors (like iMovie, Windows Movie Maker, or even Adobe Premiere Elements) might allow for some very basic PiP, but usually nothing more than letting you put a second video in a corner.

Premiere Pro (or, better yet, any modern NLE of its caliber) will let you stack videos into "layers" on a single timeline, letting you place a "smaller" video "in front of" (or "on top of", from a layers standpoint) the full frame.