720p should be better in theory for fast moving images and games, 1080i overall should be better for still images and stuff like that, but it's not quite as simple as that. The 360 is 720p native, so most games should look better on this.
It'll depend on your TV supporting it as well, but if your TV is native 720p, then I'd go for that. I've read a lot of people saying they prefer 1080i, but I prefer 720p myself. 720p is 1280x720, so uses all 720 lines of pixels due to it being progressive. 1080i is interlaced 1920x1080, meaning it's switching its rendering of lines between odd and even, so 1, 3, 5, 7, then to 2, 4, 6, 8. That's how I see it anyway, there's plenty of other threads that go into it though.
If it was 1080p on the other hand, I'd rather everything ran at that 60fps, but nobody has sets that can do 1080p at the moment, (well, very very very few people), and no 360 games support it, though that'll change when the fall update comes out.
This thread probably has most the answers after a search
http://forums.overclockers.co.uk/showthread.php?t=17633296