AJAX On A VPS

I've developed an AJAX app which is essentially a souped up chatroom. The client basically polls the server every 10 seconds, and XML containing any new information for the client is returned from the server by a php script. A separate script is called when a message is posted and stuck in a MySQL database.

It's a bit more complex than that because it also fetches RSS feeds but that's the essential core.

The bandwidth is extremely low, especially as all the graphics and javascript files are served from a separate server.

At the moment I'm running on a VPS in the US for $40/month with 512MB RAM. I'm not sure there's much more I can do to optimise the code and the queries, but the whole thing chokes when there are more than 200 online. A typical response time to a client in the UK (where most users are based) is 300ms but that grows exponentially after about 180 come online.

Being a developer who knows very little about hosting, my questions are:

* Should it be grinding to a halt with that load?
* Is any shared hosting or VPS likely to cope or am I looking at a dedicated server?
* How much RAM am I going to need to handle all the script and database threads?
* As it's only used intensively once or twice a week, would a cloud be viable or would response times be just too low?
* Can I do this for under £60/month?

I'm ideally looking for a managed solution including backups, so I can just get on and write the thing on a stable platform which doesn't need mail, secure space, redirection or anything other than the ability to serve html and xml using php and mysql.