Welcome to the forum!
From looking through the manual for the 573, it sure seems like you're going it right. "2ch Stereo" is supposed to down mix. I have a Pioneer that does the same thing.
I looked through the small print to see if it said anything about not down mixing FLAC, but I didn't see anything. The only note that I saw that might apply is on page 50 where it discusses playback of USB devices where it says, "Some features may not be compatible, depending on the model or manufacturer of the USB storage device." Do you have a different USB device that you could try?
Anyone else have any ideas?