New budget gaming system

Hi guys i'm wondering if anyone can give me some advice on a good setup for a budget gaming system. I want to spend £500 - £550. I don't think much of my current pc is useable apart from dvd drives as it's a rather old system with a pretty small case and psu. I have a p4 3.06 GHz with a geoforce 6600gt and 1 gb of ram. Even the HDD is 130 gig. I don't want to fork out on a new monitor yet as i might be moving the pc into the other room to use with my sonia bravia 32" on occasion when my gf allows . My resolution at the moment is 1280 - 1024. I have windows xp home too, so im not sure if it would be better to get windows 7 with the build to use directx 10? As you can tell i don't really know much or have much to spend so any help would be great! My monitor is 17"

Any questions just ask, i will be checking here often

I meant directx 11

I took an old P4 2.9GHz, put in a 9800 GTX+ graphics card and found I get about 80% of the performance I got when the 9800 GTX+ was in my Dual core 3GHz machine.

If that 6600 is a PCIE x16 graphics card, my belief is that you could get a huge performance increase by replacing it with a newer card like a GT250, ATI 4850 or even an ATI 5770. The 5770 is new enough that I think you would be fine using it when you replace the rest of the system in a year or two and still be happy with it (or with two 5770s crossfired). If your budget is tight and you dont want to replace the whole computer right now it is an option that will likely work.

Otherwise a system like Silvune suggests would be great.

If you have more room in the budget, then I would recommend to either upgrade to this dual Phenom II X2 550 @ £70 or this quad Athlon II X3 620 @ £75 Either will be fine for gaming, but the quad will be better in more CPU intensive tasks/apps, such as video editing and probably a tad more 'futureproof'. This would still keep you under £550. I think at £600 you would be struggling to get this Phenom II X4 955 £122 in, but it's a pretty bl00dy good processor if you ask me. Read this review for more info/better informed decision. http://www.anandtech.com/cpuchipse [...] spx?i=3638

Very few games use more than one core. Jumping from single to dual core is a pretty big boost as the background processes are handled by the second core. The increase going to a third core is more moderate. Most games perform about the same on triple and quad core CPUs. The most popular exception to this is GTA4, which thrives on quad cores.

You really need to clarify your purpose and budget. If you spend half of your budget on a quad CPU and then buy a low end graphics card you will have a much weaker gaming machine than if you buy a cheaper dual core CPU and stronger graphics card. If your main purpose is encoding HD video then the quad CPU and weaker graphics card will perform better. Knowing the purpose and budget is key to getting the best performance for your money.

Yea it's mainly games and the occasional file conversion

Any 5770 should be fine.