I would get an AM3 motherboard with an Athlon II x4 paired with at least an HD5770 perferbly go with an HD 5850 if you can afford it. The AM3 motherboard will also offer the best upgrade path for the future allowing you to use the least expensive budget Athlon IIs all the way up to the new Phenom II x6 CPUs. For gaming rig the GPU matters a hell of alot more then the CPU. Dont get me wrong though it still takes a decent CPU to run a good graphics card.
I agree with SAAIELLO. If you have $700 to spend, you might as well get a new computer. Upgrades would not give the best performance benefit. I would go with an Athlon IIx3 though. Higher clockspeeds and most games currently do not use more than 3 CPU cores.
I would suggest upgrades regardless as an option for you but I cannot, since you did not give us information on your motherboard, PSU, case, video card or model of pentium dual core or the type of ram. For example, if you had DDR2 ram, you could certainly reuse it in a new build saving about $100.