Actually the Panasonic 42PX70 does have a processor which upscales everything (literally everything - either from the tv's onboard Freeview or analogue tuners, or anything input via digital HDMI, or any of the analogue inputs such as scart) to 1080p, and then performs a simple downscale to the set's native resolution of 720p. Quite why the tv does this seemingly pointless action (upscaling to 1080p only to downscale again!) I do not know. However, who am I to question this tv's mysterious ways of doing things when it delivers such a good picture... and at an unbelievably low price. In fact, when you take the price into consideration, I think maybe the Panasonic PX70 range of tvs beat even the great Pioneer Kuros! And I might get shot for saying that.
Anyway, to answer your question Chrisku, the PX70 only has a 720p resolution, so that is the maximum resolution this tv can actually display. Like I said, it strangely does upscale all content to 1080p (obviously apart from the content that is already 1080p ie 'native' 1080p content) but then has to downscale again to fit it's own native 720p resolution. So just to be extra clear, it can upscale content from DVD to 1080p, via either HDMI or any other connection the tv has, but this then gets downscaled again anyway, because the screen's actual 'native' resolution is only 720p, so this means the maximum resolution the tv can actually display is 720p.
As for Blu-ray, that will offer a better picture than DVD. And, even though the PX70 is only natively 720p, I still recommend that if you have a Blu-ray player that you set it to output at the full 1080p/24fps resolution, if mainly to take advantage of 24 frames-per-second. Obviously, the tv will have to downscale the incoming 1080p feed from Blu-ray to fit the tv's native 720p resolution.
Now, you also ask if it is worth paying the extra money for the Panasonic 42PZ70. I would say yes. This tv does offer native 1080p, so can display Blu-rays at their full 1080p resolution without having to downscale, unlike the PX70. Also, this tv will upscale all incoming content to 1080p - and display it as 1080p ie with no downscaling. And to answer one of your questions - I personally think that you can tell the difference between 720p and 1080p even on a 42" set. That said, it isn't a massive deal when you sit at a decent distance from the tv - and the 720p 42PX70 is still superb.
You may have noticed I have repeated myself somewhat. I'm just trying to be extra clear. I think I have answered pretty much all of your questions Chrisku.