You need to replace or overclock your processor to get better gaming, I'd recommend going at least above 2.6GHz on that chip. 3 to 3.6GHz would be better, but you'd probably need a better video card to tell the difference. Pentium dual-core CPUs are very good at overclocking, but if your motherboard doesn't support it you'd need to either get the faster chip or replace the motherboard. Either way will be cheap and relatively easy.
No need to get 2x4GB, it would be more expensive than 4x2GB, and that's suggesting your motherboard supports 8GB of RAM anyway. With your video card I don't think you'd need that much RAM anyway.
If you can get 8GB of RAM then go for it, but 4GB is much easier and it's enough for you since you can't get a system fast enough to need more unless you get a high clocked Core 2 quad.
I would also recommend getting a better video card, something like the Radeon 5770/6770 would be ideal. If you don't mind using a used card you can get older models cheaper than new models with similar performance. For example, the Radeon 4870 performs similarly to the Radeon 5770 and 6770, but is cheaper on Ebay than the other two regardless of if they're new or used. Nvidia's mid-range GTX 200 cards also classify in this as well.
For a large comparison of the many different video cards from pretty much all generations relevant to modern gaming you can look at the gaming graphics card hierarchy provided by Tom's here:
http://www.tomshardware.com/reviews/gaming-graphics-card-review,3107-7.html
For an OS, Windows XP or Windows 7 would be ideal. Anything older would not work right and Vista has huge overhead. If you noticed a slow down between XP and 7, just think of Vista having a greater difference of speed between itself and 7 than the difference between XP and 7.
You could wait until the Windows 8 public beta comes out later this month, it'll be free and there's rumors about beta testers getting a huge discount on the final product when it's ready. Windows 8 is also about as fast as XP while being as compatible and updated as 7, the best of both worlds in that sense. Just make sure you teak the UI a little, disabling Metro makes it much better. Microsoft is a bunch of jerks and didn't make this easy to do without editing the registry so some developers made several freeware programs that do this for you pain-free. I used MUIT to do this on the developer preview.
Don't use the developer preview, it has some compatibility problems that won't be in the public beta and is otherwise somewhat out-dated in comparison.
If you overclock or upgrade your CPU and upgrade your video card then I'd recommend 7/8 over XP. If you stick with what hardware you have then I'd recommend XP.
Don't forget to upgrade to a quality, higher wattage PSU if you upgrade your computer's hardware. Good PSU brands include Antec, Corsair, and a few others, but bad brands are a dime a dozen. Never skimp on a PSU because lower quality ones can blow out within a matter of months or even weeks and damage the rest of the system. I've heard many horror stories of motherboards, video cards, CPUs, and more getting fried by cheap PSUs.