Actually GT5 Prologue is 720p, although Polyphony is promising that the full version will be 1080p. No, the PS3 will not upscale 720p games - the reason that most games are 720p is to keep the frame rate acceptable, so upscaling would defeat the purpose.
The TV can upscale your output to 1,920 x 1,080 of course, but you'll always get the best image using 1:1 pixel mapping. And that's where the good picture processing comes in, when you're not watching a native 1,920 x 1,080 source.
The Sony W4000 range is pretty good - we reviewed the 40in version a couple of months back...
http://www.trustedreviews.com/tvs/review/2008/05/23/Sony-Bravia-KDL-40W4000-Full-HD-40in-LCD-TV/p1
I would imagine that the 32in will be of similar quality.
As for not noticing any difference between 1080i and 1080p, it will depend entirely on your equipment, and whether your source and display both support 1080p 24Hz.
Basically, there is no such thing as an interlaced image on an LCD or plasma, since they are progressive displays by nature. This means that if you pump a 1080i 60Hz image into an LCD, you'll end up with a 1080p 30Hz image - there's no scanning involved so the electronics in the TV will just marry both halves of each frame before displaying them.
However, a reconstituted interlaced source will never be as sharp as a clean progressive source, because it will probably still have gone through 3:2 pull down prior to encoding. Therefore you'll end up with edge blur, and shimmer.
Since films are shot at 24fps, having equipment that can handle 1080p 24Hz signals means that you're watching the footage in its purest form, with no post production pull down techniques. Yes, the TV will apply even pull down techniques like 4:4 or 3:3 but that's just to eliminate the flicker that would be perceptable when watching 24fps.
Yes, 1080p is currently the best commercially available standard, but Panasonic has already shown off its 150in 4K screen. Hopefully we won't be expected to upgrade to 4K for a good few years yet though