Will my system bottleneck GTX 460 768mb?

There will be a slight bottleneck but you should still see a huge increase in performance.

try to overclock your cpu a bit more. from my personal experiance i got much lower performance when switching from GTS250 to GTX460 1GB with cpu clock at stock (though this shouldn't happen in your case since you were upgrading from very weak gpu such as 8400GS). overclocked my E7500 to 3.6ghz and the performance degraded issue is gone.

I to overclock it higher before.I took it to 3.4ghz.The system worked fine at first but after ten minutes a blue screen with something written on it came and my computer restarted.So i underclocked it back to 3ghz.Can you tell why this happened.Could this be a problem with cpu cooler.
Though the same screen had come before 2-3 times in the past 2 years even when cpu was at stock frequencies.But after restart,everything worked fine.So could this be just a co-incidence.
I dont know what my cpu cooler is but it looks weak.

have you tried stability test after overclocking your cpu? try running memtest86 to check your RAM. faulty RAM can lead to BSOD from time to time even when idle. what kind of cpu cooler you're using right now?

hi renz. i'm writing after a long time and i need your help to oc e7500. I have upgraded to radeon 6770 and corsair cx500 psu. I am using the stock cooler provided by intel. Can you guide me how you overclocked your e7500 to 3.6ghz. thanks