The game supports 16:9 widescreen, but it seems SSF is misinterpreting the resolution. Even with the latest revision I haven't noticed any improvement. Maybe some has had success running the game in its intended mode?
SSF isn't misinterpreting anything. Panzer Dragoon Zwei (and Nights), when switched to widescreen mode, will just show a little more of the scenery in the game. There is no resolution change or anything involved, it's a fully software solution, and you had to set your TV to widescreen mode manually as well.
So in SSF, you just have to set the display to fill your entire screen, assuming you use a widescreen monitor. I think the options for that are, enable Stretch Size, enable Full Size, and disable aspect correction (fullscreen).
Note that it's not a true 16:9 mode, it's just a little wider than the normal 4:3 modes.
Yup, you are running a PAL copy, that had its header edited to run on a NTSC system. Panzer Zwei is PAL optimized, running in 512 line mode. NTSC systems can only do 480 lines at best, so the bottom of the screen gets cut off.
Use SRP to modify the game image to its original PAL region.