I think you have had no replies, as we also need to know your exact settings. Your question can not be answered as you posed it. That receiver is quite old and not well thought of. One strange thing I did find in the manual, is that if you select stereo, the default is Dolby surround, which is nuts. So if you select stereo, you then have to select none. If you don't you will get Dolby surround and therefor get output from the center channel.
After looking into it, I am certain this is not a device I would want to own.
I appreciate your opinion on the receiver's performance, though it's served us well enough these past 8 years.
The default setting for Dolby Digital 2.0 is as you say Dolby Surround, by my guess because the more universal Dolby Surround upmixing was new at the time and they wanted to promote its use. It's simple to disable and does not come on as default on power-on afterwards. It is also not the case for 2.0 PCM (eg. music)
To specify, we went from a 4.1 setup to a 3.1, replacing our old fronts with our current surrounds, as these match our new center, and then finding a second pair of identical speakers to slot into the surrounds' position.
So currently we have:
Fronts: small, 80 Hz crossover
Center: small, 80 Hz crossover
Subwoofer enabled.
All upmixing disabled for all listening modes
DIRAC not calibrated.
Since posting I've gone through a factory reset of the receiver and replaced the HDMI cable to ensure no hardware defects. These did not resolve the issue.
As it turns out, when setting up the receiver for a 3.1 system is where the fault occurs. If I enable the surround channels, the 2.0 Dolby Digital stream is decoded without issue and plays properly through the front L/R speakers.
I can't figure out why though it seems a firmware error, and seeing as the 3.1 setup was only an intermediate step, the solution seems to be to just get hold of a pair of surrounds ASAP and live with the Dolby upmixing for 2.0 DD content in the meantime.
I do recall us at some point running a 3.1 system without issue during a remodeling, so it might be something introduced in a firmware update sometimes in the time since then.
Best regards