barnsleydave,
I have both consoles so can tell you that the larger the hard drive the better even for gaming but i would say that 120gb at present is more than enough. The PS3 will require you to install your games to the hard drive (or portions of game data) each time you buy one with the ammount of space required varying between games (3 - 4gb is the max i have seen) and then you still need to create a game save and allow for updates over the internet so as you can see a single game can take up to 4-5gb on your hard drive. So it is just a case of how many games you will be playing....unless things like Home, Playstation Store, Vidzone etc interest you in which case they all require extra storage space aswell. Home on PSN is a 3gb file in itself plus extra space is required to keep it up to date (i wouldn't bother as it's rubbish!) BTW not all PS3 games require an install but the vast majority do. PSN is free and the MW2 issues have been sorted long ago so i wouldn't worry about the service although it can have it's moments they are resolved quickly.
As for the xbox it is a similar setup but not identicle. Xbox live is superior to psn as an online service but you have to pay £40 a year for the xbox live gold service (£26 if you buy a code online) but the xbox live silver service is free. The xbox 360 can come with or without a hard drive but only the arcade version of the console comes without a hard drive. Unlike the PS3 the xbox gives you the option to download your games to the HDD to speed up loading times and crucially to make the thing less bloody noisey! The xbox is very loud when compared to the PS3. But game installs are not mandatory on the xbox just an option but games like forza3 buck that trend and demand 3gb of your HDD, these are rare however so you shouldn't need such a big HDD for xbox in theory. Xbox live can eat your HDD though if you like the vast ammount of games, videos, avatar stuff and demos etc that are available for purchase.
And don't forget that the xbox (no matter what MS will tell you) is unreliable and suffers from the 'red ring of death' which appears on the console front to announce it is dead! I am on my 5th xbox 360 at the moment so you have been warned. The PS3 has had a similar problem only this time dubbed the 'yellow light of death' but those problems only apply to the original 1st generation of 60gb models and i have had no problems with my PS3 atall. Time to make a choice.....hope the info helps 
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