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Use the record output.
As for how to record, I'd say depends on some aspects. I'd say if it's mainly for practice, the MD is good. Record everything and listen to it. You'll learn a lot by doing that. I know a lot of guys that can mix well, and then when they press the record button they f*ck up real bad. When you are used to constant recording, that "stress factor" will be gone.
If you wanna make a mix cd, and you have the harddrive space (and a good recording program, like cool edit or soundforge) I'd say it's better to record straight to your computer (especially if you're also planning to make mp3's of it). If you record on MD first, there's already some compression. Transfer from your MD to your comp is likely to be done analog, so there will be a minimal amount of noise added. So you see, if you wanted to make the cleanest mp3 or cd, you already lost some quality in the process.
Also if you want to make a "pro" sounding mixcd, a little mastering would be welcome too (can also be done with progs like Soundforge and the likes).
As to burn, Nero is a good choice. Some of those recording/editing progs have burning capabilities too (Wavelab, Samplitude). If you want to make a cd with one long mix, but where you can still skip tracks (so one continuous signal, without 2s pause between each index), be sure both your cdburner and burning prog can do Disc-at-Once burning (Nero can, Samplitude can, soundforge can't, ...)
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