The only thing that is going to help you is really fast disks, and more memory, and you should consider moving to 8.3 for all the other performance benefits.
Is 8.3 is a stable version or what is the latest stable version of postgres ??
Yes it is the latest stable version.
moving my database from 7.4 to 8.3 will it do any harm ??
You will have to test this yourself. There may be issues
what are all the advantages of moving from 7.4 to 8.3
Every version of postgresql has improved performance, and robustness; so you will get better overall performance. However I want to caution you this is not a panacea. It will NOT solve your seq scan problem.
