keyboard and mouse ftw! you can't beat the accuracy and controllability, especially in shooters.
a lot of games let you use an xbox controller if you prefer - especially games labelled as 'games for windows'
i use an xbox controller for my driving games, as it's more fun.
your current graphics card should play games well.
as for recomendations, it all depends what genre of games you enjoy.
there are loads of shooters, driving games, flight sims, rpg's, adventures, rts's, sport sims, massively multiplayer or more involved strategy games.
fancier controllers like steering wheels, joysticks, infra-red tracking headsets etc are also available and supported in many games. having a mouse with extra buttons on the side is very convenient too - so you can quickly pull out a knife (for example) and stab someone

without scrabbling around on the keyboard looking for a certain key.