360 has the better library right now.
PS3 might have the better library in the future, but that remains to be seen.
Right now, one of the best online games (if not the best) is available on both consoles (Call of Duty 4) and runs identically on each. If you're really only into one or two games a year, the PS3 will satisfy, as there will be at minimum 1-2 Multiplayer blockbusters a year + the major 08 exclusives (Grand Theft Auto IV, Metal Gear Solid 4).
If you want to play more than 2 games a year, the 360 has a great library already and it keeps on growing, you can't really go wrong with it. COD4, Gears, Halo are all great multiplayer titles.
Ultimately, it comes down to which exclusives interest you more. Anyone who really loves video games unfortunately has to purchase all 3 consoles this generation because there are too many good games out there for both systems (heck, even the Wii has some solid titles).
If you like watching Hi-Def movies, go with the PS3 for the added Blu-Ray factor. This is a significant advantage the PS3 has over the 360 (you can buy the HD-DVD addon for the 360 but it's not as technically robust as the PS3's BR player is, you're better off buying a different HD player for cheaper).
As for which PS3 to buy - it depends on whether or not you'd like the backwards compatibility feature or not. The harddrive size is pretty much a wash because you can upgrade it manually for cheaper.