iTunes is absolutely optimized for dual cores (as are almost all audio or vidoe encoders, due to the ease of parallelization of encoding).
iTunes is, however, notable among encoders in that it does not readily create more than 2 threads, so it does quite poorly (relatively speaking) in quad and octo-core systems.
Also, even if iTunes could only single-thread, it would still solve the OP's problems to have dual core, since it would only be able to use 50% of the system, leaving a full core for all his other tasks.
Since I'm assuming the OP doens't want to buy an entirely new laptop, I would again suggest making iTunes a lower priority task (which should help other program's responsivenss). itunes will still use 100%, but it will be much more willing to share (instead of taking 100%, it takes whatever is left after everything else is done, so you'll still be at 100% usage, but itunes will get say 90% instead)
Also, the suggestion to try a different codec is a good one, mp3s should be easier to create than aacs (I think)
Also, it should be noted that the P-M is not a very good chip for media encoding, I believe the core 2 duo is over 3.5x faster (clock for clock) thanks to it's SSE3 instructions, and 4 wide execution unit.