As mentioned by Jaffveyda, the best cheap upgrade for your system (assuming your current motherboard is a good one) is to drop in a quad core (personally I would suggest looking for a second hand Q6600), upgrade the RAM to 4GB total and drop in a nice graphics card (I would go with the excellent GTX 460 768MB to keep the price down).
Another option (probably the best if the current motherboard and RAM are not great) is to sell the existing CPU, RAM, graphics card and motherboard. Then buy a nice Athlon II X3/X4 CPU, 4GB DDR3 RAM and an AM3 motherboard, then buy a GTX 460 768MB to beef up the graphics.
That's a good board - (P35 chipset), so I would suggest keeping it, adding in a quad core (Q6600), 2GB more compatible RAM (or sell you existing 2GB and buy a faster, higher density 4GB (2x2GB) kit) and a GTX 460 768MB. This should just be within budget and give you a very decent performance boost for your money.
I would not suggest going down the i3 route - it is rather expensive and means you won't have much money to get a nice GPU upgrade (which would give you a big performance boost when playing modern games).
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