I recently needed to upgrade (January, after amassing some xmas cash, and I laid out on a prebuilt barebones machine from Novatech, for around £290, all you need to do is add dvd,hdd and video card.
Intel Core 2 Quad Q8300
2 x 2GB DDR3 1333Mhz
ATX Black Gaming Tower Case
550w ATX Power Supply
I bought a new 640gb drive, and reused my old dvd writer and video card ( a Radoen 4830), and for under £350 I'm playing stuff like Just Cause 2 at fairly good quality. (I think JC2 was my last purchase, dammit I should have posted about that, it was £7 on Eidos's own site.)
I'm pretty sure that when it starts to lag with newer games, all that will be needed is a new video card.
I've also got an electricity monitor and it appears my whole apartment only pulls around 500w when I'm gaming, drops to around 400 when not pushing the PC.
I have to admit however, if I had the money, I'd go higher spec, but just saying, you can do a lot with not much and you don't even have to be an expert PC builder, just have the confidence to push a HDD and video card into place.
(I admit installing CPUs, with all the thermal paste etc, still gives me the fear, in theory I'd be fine, but knowing I could blow my whole upgrade with a slip spooks me, seeing the majority of my upgrade budget just pop with a burst of smoke.)