The i7 is better, in some cases by a lot, in others by just a little. It really shows off in super threaded applications like video encoding, but doesnt fare too much better in gaming.
i7s have multiple things going for it, hyperthreading gives it 8 logical cores from its 4 physical ones, hyperthreaded cores dont work as fast as a true 8 core would but still give it a significant lead over the Phenom II in tasks that have more than 4 threads. The nehalem architecture also provides significantly more instructions per clock than the Phenom II's does, an i7 920 @ 2.66 will beat a PII 965 @ 3.4 almost all of the time, the i7's also have turbo boost which will take it and bump it up 1 multipliers if all cores are under load, 2x if 2 are under load, or 4x if only one is under load, this gives it a max speed of 3.3GHz in single threaded apps which the 965 certainly cant catch up to.
However, its also important to realize that in gaming, your bottleneck is rarely your CPU and if you have the detail settings up high enough that your GPU is the determining factor in your FPS, the difference between the i7 and the PII is only a few frames at most.
Over in the US the 860 runs $280 and the 965 is about $200 so the price difference between the two isnt as major as it is for you so the overall platform cost is much closer between the two. If you are limited on budget the 955 is a better choice than the 965 and may be a better choice for you, but performance wise the i7 is better.
The Phenom II 965 is $195 on NewEgg, and the i7-860 is $280 on NewEgg. The prices on that website are severely out-dated.
Clock speed is by far not the only determining factor in CPU speed. The i7 has better architecture than the Phenom II's, causing i7's to be better than PII's even at equal or lower clock speeds.
For professional applications, such as video editing, encoding, rendering, compression, etc - the i7 is much better due to hyperthreading. For gaming, they're about equal. For general computer usage, office tasks, and multitasking they're both overkill.
Make sure to look up some reviews for the two on THG, Anandtech, LostCircuits, OverclockersClub, etc.
If clock speed is not the only determining factor in CPU speed, then on what other factors does the CPU speed matter ?
Consider that this CPU is to be used to play high-end games.
Without getting into extreme details, the architecture of the chip is extremely important in terms of performance. The i7's Nehalem architecture is flat-out better. The i7's have more instructions per clock, meaning that if both chips were at the exact same clock speed, then the i7 would be faster. i7's also have hyperthreading, which allows basically allows it's 4 cores to act as 8 virtual cores. The L3 cache on the 965 is 6GB, compared to 8GB on the i7. Etc.
Now in terms of gaming, both CPUs will be relatively equal. For gaming, there's no point to getting an i7-860. The i5-750 will net you the exact performance of an i7-860. Both an i5-750 and a 965 will be identical in gaming and cost exactly the same.