I will still go for a 42" panel with native resolution of 1366 x 768 (720p panel) that support 1080p video signal. Most of the recent HD Ready (720p) panel supports 1080 video signal, as Ive said before, the 1080p is being "fit" to the 1366 x 768 native resolution using 1080p video signal.
Upscaling player is still necessary so you can maximize your panel even if the panel is not a full HD. Some upscaling player supports upscaling upto 1080p and this video signal will be utilize by your LCD esp if it support 1080p video signal.
Remember that video signal is different from native resolution.
What happens to the image given the ff scenarios:
A. 720p signal -> 1080p LCD
B. 1080p signal -> 720p LCD
A: The output will still be 720p (the panel will be passive and will be based of the source player)
B. The output will depends on your LCD capability. Again, some 720p lcd can accept 1080p video signal, thus it will display 1080p.
If the lcd does not support 1080p video signal, then using the B scenario... it will not shown any video signal. Either you set the source player to 1080i or 720p. And the panel will display the signal respectively/correspondingly.
Would setup "B" be better than doing setup "A"
Set up A will always be better since the panel is a FULL HD. However if size will be different, I would choose a non FULL HD LCD of the bigger panel size BUT it SHOULD accept 1080p signal (even if its not a FULL HD).