Go for HD 3850, its a very good card for the $, 2900pro is good too, its basically a lower clocked 2900XT, and they are alot better than 8600GT
For PSU, go for Corsair 450, its better
For your tight budget it seems as though the 3850 is your only option. I think BB has it for $150ish. Try and OC it to see if you can get more out of it.
I would like to also mention I purchased a ThermalTake 500W PurePower PSU for $25 AR. It was at the egg, go check it out. I think they have 2 500W PSU, one really expensive, make sure you get the one with the Rebate. Should be about $50's without. I use this to power my 8800GT and OC'd E2180, so you would be all set, not only that it has a sweet dead silent 120mm fan that can be considered an exhaust fan as well.