Stereolad:
In general you will get a better quality of sound from hi-fi seperates. Micro systems are more compact but the sound quality probably won't be as good. I think the Onkyo and Denon micro systems are well regarded.
Superfi do some deals on seperates:
http://www.superfi.co.uk/index.cfm/page/category.cfm/Category/253 which might be worth a look. I've personally got NAD seperates and I think they're good value if you're on a budget.
That is a good system but way over your budget. I would suggest ebay for some older second hand Arcam amps and cd players and then some speakers like these Tannoys http://www.richersounds.com/showproduct.php?cda=showproduct&pid=TANN-CUSTOM-F1
The advantage with separates is that you can upgrade gradually, piece by piece. Here is an example of what you can get for your money. You might be able to get the Tannoy speakers with a decent amp and cd player from Arcam for around £250.
http://cgi.ebay.co.uk/Arcam-Alpha-7-CD-Player-EXCELLENT_W0QQitemZ110288545954QQcmdZViewItem?hash=item110288545954&_trkparms=72%3A1089%7C39%3A1%7C66%3A2%7C65%3A12%7C240%3A1318&_trksid=p3286.c0.m14
http://cgi.ebay.co.uk/Arcam-Alpha-7SE-CD-Player_W0QQitemZ110286456927QQcmdZViewItem?hash=item110286456927&_trkparms=72%3A1089%7C39%3A1%7C66%3A2%7C65%3A12%7C240%3A1318&_trksid=p3286.c0.m14
http://cgi.ebay.co.uk/Arcam-Alpha-8-Integrated-Amplifier-Amp_W0QQitemZ150293170615QQcmdZViewItem?hash=item150293170615&_trkparms=72%3A1089%7C39%3A1%7C66%3A2%7C65%3A12%7C240%3A1318&_trksid=p3286.c0.m14