You want your graphics card to be the bottleneck, if its not you should turn up the graphics settings until it is. A CPU upgrade to an i5 will require you to switch to DDR3 and a new motherboard so it you might be better off getting one of the higher level C2D's or C2Q's that your motherboard supports.
Right now the CPU is the limiting factor, the HD4870 is still a potent card and should run even demanding games at high settings at your resolution.
Overclocking the CPU is the cheapest way forward, the C2D chips do not require massive cooling to run much faster. One of the better 'cheap' coolers is the Coolermaster Hiper 212+, it's no super cooler true, but then it kept my E6600 cool enough @3.4GHz .
Adding a faster CPU is another option- a quad for preference- while they are still available in the LGA 775 package. Add in a better cooler as well, that way you can overclock later (or straight away ).
As has been said, an i5 or i7 is going to need a new motherboard and memory, in which case it might be better to sell the current rig and go for a new build.