Even with this setting unticked, it doesn't behave as advertised, even after restarting VLC, even with the newest version. Worse, it's scaling a smaller video *up* to the size of the interface (a totally separate nuisance from resizing the interface to the video size--in other words it is resizing the video to the interface size). Worse still, if in the video menu I untick "Always fit window," after a file plays, VLC presumes to put a tick mark back in "Always fit window," which TICKS ME OFF!!
Also, I thought I'd found a workaround for this before, but can't figure out what I'd done. Whatever causes this, it's not user error: it's either bad code or settings that are too difficult to control or understand. This is on Windows 7. Running it with administrator privileges doesn't change the problem.
I am so peeved by this that I'm motivated to get the da*n source code, FIX IT, and submit a patch. This is a *very annoying bug.* I'll be looking into how to do that; meanwhile, if anyone happens to know where to point me to do so, I'll be glad.