Upgrade AVP or separate preamp/DAC for 2 channel?

My current set-up is:

AVP - Onkyo PR-SC5509
Amp - Moon MC-8 channel amp
Speakers - Focal Electra Be 5.1 speaker system (1028 fronts, 1008 surrounds, with matching centre and sub)

I'm considering replacing the AVP with a Denon AVP-A1HDCI (with XT32) OR adding a 2 channel preamp / DAC such as the new Audio Research DSPre (DAC and preamp combined).

I'd be interested in any thoughts on what (if any) improvements I might gain for HT and/or 2 channel by adding the Denon AVP or separate 2 channel preamp. Would the Denon AVP significantly improve the multichannel sound as well as the 2 channel sound (I'm assuming there would be at least some improvements on 2 channel over the Onkyo AVP)? Or would I be better off sticking with the Onkyo AVP for multichannel and adding a separate 2 channel preamp/DAC?

Many thanks in advance!
Definitely go the 2 channel preamp route. It will significantly outperform any avp. So much so I scrapped multi channel all together for both music and movies.
If you're serious about 2-channel definitely go with a stereo preamp to handle the front L/R speakers and use the Onkyo to process the center/surround channels. The preamp can be one of the most important influences on the kind of sound you get from your system, and most good stereo pres (and obviously the ARC) will trounce what you get out of all but the best AVPs.

I'd just be a little hesitant to lock into the DAC section of the DSPre. As good as it probably is, the DAC world is progressing so rapidly it might be better to get a separate pre and DAC so you have more flexibility to upgrade the DAC going forward. ARC is great, but at that price level you should try at least a few others (in your system if at all possible) to see what really works best sonically for you in the context of your system. Best of luck.
Just remember that (with a couple of rare exceptions), your 2-channel preamp won't have room correction and, more importantly, will make it very difficult to integrate your subwoofer. If you don't need your sub for 2-channel, I agree that a dedicated 2-channel preamp is the way to go.
Been there, done that. When it comes to 2 channel, nothing is better than a dedicated 2 channel preamp. Your main spks are very good floors stander that capable down to 34hz so no worry there. Not a lot of 2 channel music matetials that have bass in the 20hz region. I don't think you need sub unless you listen to pipe organ or a heavy bass lover.
Very helpful replies. Thanks!

The separate 2 channel route is clearly favoured, but Mateored's point re room correction and sub integration is a very good one. The Denon AVP allows both sub control for 2 channel and XT32 processing for 2 channel.

So the comparison for 2 channel would seem to be: Devon AVP with XT32 processing and subwoofer vs separate 2 channel preamp without processing and subwoofer. Given I have the smaller 1028 Electras, I think the sub is quite important for 2 channel.

Soix, you mention that 2 channel preamp would be better than all but the best AVPs. Do you put the AVP into that category? if not, what AVPs are you thinking of?

This is a tough one!
In theory, if the stereo pre has a HT bypass (or even if it didn't) shouldn't the room correction still work for HT? Personally I wouldn't use the room correction for stereo listening, and with the 1028s I question needing the sub for that as well. So maybe this could still work if you're willing to let those things go for 2-channel?

As far as higher-end pre/pros I was thinking something at the level of the Bryston SP3 or above (actually I'd probably take an Anthem over the Denon as well). Would I put the Denon at that level? I can't say because I've never heard it (but I do have a Bryston stereo pre), but it seems highly unlikely to me. I'd want my pre/pro to at least come from a manufacturer with a reputation for creating really good stereo preamps if 2-channel is my priority. As far as I know Denon doesn't make any stereo preamps at all, so it's hard for me to believe the preamp section in the AVP stacks up to something from the likes of ARC or even Bryston. Oh, and then that questionable preamp section is housed in one box containing a whole bunch of digital processing and other power supplies (possibly not all that great and maybe even shared), etc. that could muck up the sound further if not isolated properly. Then again, maybe I'm just an audio snob.

If your priority is 2-channel it makes sense to me to put more of the money into a really good, dedicated stereo pre and let the Onkyo continue to handle the relatively less important surround duties, which it probaly handles just fine I'm guessing. Personally I'd sacrifice the room correction and sub for stereo listening if it means I could get something like the ARC in my pure 2-channel signal path. Then again, if you're willing to drop the coin on an expensive pre/pro that could work too, but make sure the analogue preamp section is well sorted out and matched to your overall system so you can reap the true benefits and potential for 2-channel. Just my $0.02 and hope this helps more than hurts.

Have you had a Pro calibration of your onkyo? I believe K. Rubinson had very good results regarding sound quality after he did the Pro level calibration on his Integra (which I believe is functionally very similar to your onkyo). This avenue could save you a bunch of dollars and headaches.
I faced the same dilemma and decided to go with a Cary Cinema 11a based on Michael Fremmer's rave review of the quality of its sound, and his contention that a separate preamp was not needed. I knew in advance it has bugs, but after some experimentation, stereo (XLR) and 7.1 (RCA) analog from an Oppo BDP-95 now connect to the Cary in bypass mode. A DirecTV HD-DVR connects via HDMI. The Cary connects via XLR to Proceed HPA 3 and HPA 2 amps, and to a Velodyne SMS-1. The mains are KEF Reference 107/2s with Reference 102s for center and surround. The subs are a pair of Velodyne HGS-15s. This setup is bug free and provides superb sound for music, films, and TV. Everything except the Oppo was purchased used, so the overall cost was relatively low.
Thanks again for the replies. Extremely helpful!

Soix, in particular thank you for your detailed reply. I was considering the Bryston SP3 (and the Cary Cinema 12), but no room correction ruled it out. I understand that both sound superb on 2 channel though.

Airkitty, I haven't done the Pro calibration for XT32 but I will look into that for sure.

Based on the responses, I think sticking with the Onkyo AVP for multichannel and adding a decent 2 channel preamp and DAC is the way to go.

In terms of which preamp / DAC, I am partial to the ARC equipment, but any other recommendations would be gratefully received!
ARC preamps with HT bypass have an input or remote button labelled "PROC" for "PROCESSOR".

I build my own speakers, so do a lot of in-room measurements.  The two places where DSP / room correction turned out to be critical was the subwoofer and center channel.  I decided to get a miniDSP.  It's kind of a geeky solution for most though, but in my setup it works wonders.  I have Zero DSP on 2 channel listening, and when movies start up it's a seamless sound.

I also did some room acoustics, with a pair of GIK soffit traps and 5 panels. I'm very happy with the tone.  Now I'm thinking of an ARC 2 channel preamp for better imaging.  We'll see.

The conrad-johnson ET3 is an excellent preamp,  it is a full featured remote unit that has a unity gain HT bypass......you have a great amp and speakers so something like it would be a good investment