I'd consider settling for 1GB of Ram, then spending the rest of the money on a decent graphics card. I upgraded my ram from 512MB to 1GB of the fastest performance Ram my PC could take, and to be honest, save from some slightly faster loading times (more noticeably quicker program closing times), and slightly smoother gameplay for certain titles, there isn't a great deal of difference. However, 256MB Ram to 1GB should be a really noticeable improvement. Newer games will appreciate 2GB ram, but if the rest of your PC isn't up to much, you won't get the full benefit as the other components will create bottlenecks elsewhere.
By saving money on Ram, you can get a better graphics card. Check out Ebuyer.com, a really really great site for PC stuff, the cheapest I've found. You should be able to get a reasonable card for upto £100. Be aware a more powerful graphics card may require a bigger power unit in your PC to work. If you've got AGP slots, a good card for your budget is a Nvidia 6600GT, although they tend to have 128MB ram which isn't enough for some more demanding titles. Sadly nearly all the latest Nvidia cards all require PCI-E. Even the budgety ones.
ATI still have plenty of AGP cards. I don't know much about them though, but there's a few under £80.
And if you have any spare cash, check out Ebuyer's price for the OEM version of the Soundblaster Xtreme Music card: under sixty quid! I'd be enjoying mine now except the delivery chap decided not to knock on my door and instead helpfully leave a, 'I called but you weren't in, but you might have been, I just couldn't be bothered to hang around for more than 10 seconds' card and now I have to wait til Monday for it. Damnit!
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