Well lets point out the list of things you failed to include
Budget....resolution....games you play...what settings these games are....you will probably have to upgrade your psu....how long do you want this system to last?.....it would probably be best to just save up atm and upgrade the system at once....
@ Goofy123: That configuration is quite well balanced, upgrading just the CPU or graphics card will have a fairly limited effect, not no effect, just limited.
We really need a bit more information, particularly resoloution and PSU. Without that all we can do is speculate as to which course of action would be best for your situation.
Thanks for the prompt responses. I mainly play games in 1280x1024 and medium to low details. Typical games are Titan Quest, Sacred 2, World in Conflict, Red alert series ... not really a fan of first person shooters.
My PSU is 600W.
The CPU is socket 939 so might be difficult getting a compatible chip! (Ebay???)
I see a AMD FX-60 socket 939 for £150GBP.
I figure either get a better cpu or video card .. else trash the whole system.
My first system was that exact setup. Save 1 extra gig of ram.
Have you tried OC'ing the AMD dual core yet. I only just recently tried and have had great results. I have OC's to 2.65 with a bump in voltage to 1.375 and it has stayed stable. This could save you some money for the time being. I would just make sure you have adequate cooling in your case for this before you try
I also upgraded my video card recently as well to a GTS 250 and did not get a noticeable improvement in performance over the 7800gtx,(on the stock CPU settings and the OC settings) I did not want to go any higher in card such as the 260 or 275 due to the speed of the proc in fear the card would be bottle necked.
I would say save your money and get a whole new system in a couple of months and for now turn down some settings in the games to improve performance and if your feeling frisky try to OC the CPU a little and see what that brings you.
@ Goofy123: NO, NO, NO! Do not get another socket 939 processor, and certainly do n't pay that much for it! you will be better off with a new CPU/MB/RAM upgrade.
Assuming you have a decent quality PSU: Get another graphics card first. As Irish says, you'll see little improvement, some, but not much. Given the prices here in the UK I find it hard not to recommend the 1Gb HD4870 although its smaller 512Mb brother will be plenty at your chosen resoloution the bigger card has a longer future.
Pop over to the Homebuilt Forum for better advice, those three bits plus memory should be about 320 pounds but it is far from heavily researched. For example you could save a fair bit with a AM2 or AM2+ CPU and a less capable graphics card.