New chip or card?

check asus forum for your motherboard before upgrading, overheating and other problem

You will need to upgrade your Power supply to run a more powerful card but your CPU will handle it ok. I would say up to a 5850 would be ok but more than that would start being hampered by your CPU. That is a faster CPU would be of benefit. Not totally needed but you would see a differance.

Mactronix  

Would i see a noticeable difference in performance compared to my gtx260? or would a better processor give me more performance from my card? Also could you recommend a good PSU upgrade?

Was looking at a 5850 or 6850 which is better?

5850 is better than the 6850. I know that sounds kind of weird, but 5XXX GPUs are more powerful than 6XXX GPUs where the XXX is the same.

Take a look for yourself http://www.techpowerup.com/reviews/HIS/Radeon_HD_6850/2...
As I said you already have a CPU capable of running the card to its full potential so why would you want a CPU upgrade ?

Mactronix

it is not weird. amd just make some adjustment to naming scheme. to some people it is confusing but if you read reviews you'll know which is which have better performance.