Wisest Upgrade from Core 2 Duo Socket LGA775

I built my system about 4 years ago using an MSI P965 Platinum Mboard with Intel Core 2 Duo E6400 (2.13mhz, 2mb cache, 65nm). Still running XP pro but thinking of upgrading to Win7 and want to upgrade my proc and RAM for best performance. There are SO MANY processors out there e.g. dual core, core 2 duo, quad core, 45nm technology, Wolfdale, Conroe, etc. etc. I'm looking at a Core 2 Duo E8500 3.16ghz, 6mb cache, 1333fsb. My questions are: 1)Will this be a significant speed increase? 2) Would a new Core i7 be much faster (E8500 is about $225 right now, so I'd be looking at that price or less considering I'd need a new Mboard and RAM as well). Thanks!
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  1. You can get a new I5 2500K for the same price so I would say do a full upgrade if you can.
    The speed difference between e6550 and e8500 http://www.anandtech.com/bench/Product/61?vs=55
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