HDD - £30-50
Memory - £40-50 for 2gb, £80-100 for 4gb
Case and PSU - £60-80
Motherboard - £40-60
CPU - £60-80
Optical Drive - ~£20
So thats about £300-350 for the basic innards for a system that won't go up in smoke when playing new games.
Then you're going to have to make some tougher decisions. Windows 7 or Vista will cost £80-100 new. Might be worth looking into finding someone with a spare copy or even considering an illegal copy if you're *really* pushed for money.
Then for a monitor you can spend pretty much whatever you want, especially if you're willing to get something second-hand. You can get a 19" monitor new for £80-100, and you don't really make any savings by going down to 17". But I daresay you can find something much cheaper on ebay.
And finally, pretty essential for a gaming machine; a graphics card. Basically, you get what you pay for. If you're really pushed you can get something acceptable for £50, but you'll be running the latest games on their lower graphics settings. If you go up to £100 you'll be running most current new games on their higher graphics settings, although probably still lagging a little on the highest demanding games and settings. If you go up to £150-200 you'll likely be able to run highest graphics settings on new games for the next few years. So that's really up to you. Can always update at a later date if really necessary.
I went through the same process a month ago, initially trying to keep everything under £500. But I decided the difference between a £500 and a £700 system was significant enough to be worth hunting around for that extra £200. Better to spend a bit more now than to be disappointed or having to buy a new system in a couple of years. But that's just me... If you can find a cheap 2nd hand monitor and swing a free OS then it's certainly possible to build something that will play the latest games adequately for £500.