Upgrade AVP or separate preamp/DAC for 2 channel?

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.