Er, whether 720p or 1080i is visually superior is a matter of some debate and certainly not as black and white as KD makes it. However, I'd recommend 720p for the 360 since most games support it natively (1080i is upscanned by the hardware for games that aren't 1080i native).
How do you know whats what? MY 360 gives me options only for screen resolution-1280x1060, etc, so I just select the highest res from that list.
You're using the VGA adapter, yes? 720p is equivalent to 1280x720. However, IIRC, you are using the Dell 2005FPW? It has a native resolution of 1680x1050 so you aren't really going to be able to match the native resolution of the game (720p) with the native resolution of the monitor. Luckily the Dells scale very well and the 360 scaler seems to be be pretty good too so I would just try all of the different resolutions until you arrive at what you think looks best on your monitor.