I'd say the processor speed is negligible. The real feature of the newer iMac is the faster bus speed. The 1GHz had a 133MHz bus, the new one sports a 167MHz. That in itself makes a pretty big difference. Plus, you get USB 2.0.
Is it worth the extra few hundred? Depends on how hardcore of a user you are. If you're just doing light gaming, surfing, and email, go with the 1GHz. If you do a lot with your computer, I'd go for the faster model. Generally, you should buy the best computer you can afford.