Help with upgrading options

I want to give my gaming computer some headroom for a year or two so i'm going to upgrade the graphics capabilities but am stuck between two options:

Currently have a mildly updated HP Pavilion a6700y-

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Option 1: Added an HD 4650 (PCIe), 4GB ddr2 ram and a 400W power source a while ago which is adequate but i'd like more, especially now i have a 23" LG monitor. I have my eye on an HD 4870 (i think it will fit) but am i right in thinking this will be too much for the CPU?

After a bit of research i think the motherboard can cope with a Phenom X4 9650 (currently a Phenom X4 9150), a hike from 1.8 to 2.3 Mhz. I checked the front end bus and power specs of the motherboard, and it looks like this would be the most powerful unit i could use. Would that be sufficient for a higher end GPU? I could then upgrade the PS and card for a total of around $350.

Option 2: Alternatively i could go for a new motherboard and processor, i'd have to buy ram and the GPU+PS on top which obviously adds at least $300. And i wouldn't know where to start for that because there are so many options, i'm open to suggestions though.

Would just swapping out the processor and putting a better card be worth the gains or should I go for a new motherboard/CPU combo. Or will the current processor be ok with a higher end GPU? Is there a cheaper way? if i can get away with spending 300 bucks, that would be great. I don't need a screamer, mainly use it for games like rFactor, GTR, COD and Arma2. rfactor2 is likely to be significantly more demanding.

Thanks in advance for any advice.