I would like to encode with mencoder stream from my /dev/video0 camera and
send it directly to mplayer for immediate watching (or to any
other player => this is why I need to encode it with mencoder first)

I tried something like this:
$ mkfifo output.avi
$ mencoder tv:// -tv driver=v4l2:width=720:height=576:device=/dev/video0
-ovc lavc -lavcopts vcodec=mpeg4:vbitrate=900 -o output.avi -v -nosound
BUT this does not work
$ mplayer output.avi (this is how I wanted to play it)

When I save stream to normal file first, mencoder works ok - but file
is getting bigger and bigger, so this is not way to go for me (I need
to save it to something like fifo and then play it in realtime).
Any idea please how to put strem into fifo or pipe and then play it?