Kem, Daniel has addressed most of the issues here, I just thought I'd explain a little more how the app currently works.
When you tap the "HD" button the app runs through the little workaround we have in place to try and retrieve a high definition file form YouTube. It's quite a crude workaround to be honest as Dan has mentioned YouTube don't want us to be able to do this.
So, we do a call to the servers and the app tries to parse their response to dig out a playable file directly in Windows Phone's media player. If at any point this fails then the app will default back to the safer, old method; which is to call a web link that the Microsoft YouTube app understands thus playing through that app. As you no doubt no the quality when playing through that app depends on whether or not you are connected to a mobile network or WiFi.
We have labelled the HD video as experimental in the app for this exact reason, we just can't ever guarantee it will work.
Dan is also correct that in the past we have not been able to hand off YouTube playing responsibilities to other apps like MetroTube. However, this is something which may now be possible if I can get in touch with the MetroTube guys and ask them to implement a protocol for me to call. This will be looked at in the app v4 release provided all comes together correctly, and if possible will be a setting in the app.