[Gabriel Borba]"I'm working with 720x480 footage on FCP7.
I'd like to know which option results in better image quality:"
As Rafael suggested, the quality does not get better because the image gets bigger.
You might try changing the compressor in Sequence>>Settings to ProRes 422 however. It won't make your DV footage any better, but it will certainly make any text and graphics you use in the sequence a heck of a lot better by avoiding DV compression.