That is an old camera...

Looking here DPReview suggests that it had a 1meg sensor. Just about any "real" (discounting the "toy" ones) digital stills camera on the market is probably going to match it for picture quality (except maybe the tiny ones with small lenses).

I not convinced on the stills from a DV camera idea, all the stills I have seen from those cameras are pretty low quality. At under £500 we are talking about the lower end of the DV market as well, which probably won't help.

However, for £500 you can just about get a DV camera AND a digital stills camera and have the "best" of both worlds.

There are a couple of DV cameras here at just over £300 (£315 being the cheapest):

http://www.internetcamerasdirect.co.uk/a-panasonic-nvds60b-deals.htm
http://www.internetcamerasdirect.co.uk/a-jvc-GRD20-deals.htm

On the same site you will find a range of digital stills cameras that are less than £200. For example I bought this Casio for my Dad for his birthday:

http://www.internetcamerasdirect.co.uk/Casio-Exilim-EX-S20-digital-camera-deals.htm

That probably wouldn't suit you because it doesn't have a zoom that you are used to. There are plenty of other that do. For example:

http://www.internetcamerasdirect.co.uk/Canon-PowerShot-A60-digital-camera-deals.htm
http://www.internetcamerasdirect.co.uk/Canon-Digital-Ixus-II-digital-camera-deals.htm
http://www.internetcamerasdirect.co.uk/casio-qv2900ux-digital-camera-deals.htm
http://www.internetcamerasdirect.co.uk/fuji-a303-digital-camera-deals.htm
http://www.internetcamerasdirect.co.uk/Kodak-Easyshare-DX6340-digital-camera-deals.htm
http://www.internetcamerasdirect.co.uk/minolta-dimage-s304-digital-camera-deals.htm
http://www.internetcamerasdirect.co.uk/nikon-coolpix-3100-digital-camera-deals.htm
http://www.internetcamerasdirect.co.uk/Olympus-Camedia-C-350-digital-camera-deals.htm
http://www.internetcamerasdirect.co.uk/sony-cybershot-p52-digital-camera-deals.htm

You can see a whole list of cameras under £200 here:

http://www.internetcamerasdirect.co.uk/digital-camera-price-A.htm

Of course, if you decided to spend all of your £500 on a stills camera you could get a very good camera:

http://www.internetcamerasdirect.co.uk/Nikon-Coolpix-5400-digital-camera-deals.htm
http://www.internetcamerasdirect.co.uk/Canon-Powershot-G5-digital-camera-deals.htm
http://www.internetcamerasdirect.co.uk/nikon-coolpix-4500-digital-camera-deals.htm
http://www.internetcamerasdirect.co.uk/Sony-Cyber-shot-DSC-V1-digital-camera-deals.htm
http://www.internetcamerasdirect.co.uk/Fuji-Finepix-S5000-digital-camera-deals.htm
http://www.internetcamerasdirect.co.uk/fuji-finepix-s602-digital-camera-deals.htm

P.S. I have no connection with Internet Cameras Direct, except as a happy customer...
P.P.S. Don't forget to budget for a memory card, camera rarely come with a big enough. Also if you get a camera that takes AA batteries makes sure you budget for a couple of sets of Ni-MH batteries and a charger.