Hello Matthew,
First a 1500 Byte IP packet will be forwarded out over the interface IP routing determines to be the best path to destination. With a 3660 the whole process should not take longer than a few Micro-seconds - neglegible compared to usual transmission delays.
Relating to your post title: there will be no IP to TDM conversion. An IP packet might be transported across several different types of Media and OSI layer 2 protocols - it still remains IP. So your terminology is somewhat misleading.
Second, an E1 interface (with HDLC as default encapsulation) on a Cisco router by default will offer a MTU (maximum transmission unit) of 1500 Bytes as well, so there is no need for IP fragmentation. The same applies to Frame Relay.
About overhead: comparing E1 to Frame Relay is not really reasonable in my mind, because you are talking about two different OSI layers (E1 layer1, FR layer2).
As to Frame Relay overhead, there are at least 6 Bytes (2B flags, 2B header, 2B CRC). With different encapsulation types you get additional overhead (usually less than 8 bytes).
A.3 This is a question related to Queueing. By default Cisco uses on interfaces up to E1 speed Weighted Fair Queueing. So it will not be FIFO. WFQ is somewhat more comlex, but in short and much simplified sorts smaller packets in front and larger packets to the end of the Queue. This ONLY happens when there is more traffic than the interface can handle. In all other cases everything is sent with line speed.
Hope this helps! Please rate all posts.
Regards, Martin