The highest, then let the TV scale down to its native panel resolution (1366x768). That would be 1080i (1920x1080) from the HD DVD player.
If you see any unusual horizontal lines on fast moving video images switch back to 720p as this suggests that the deinterlacer in your TV isn't doing its job properly (which may be the case given your TV's low-cost nature). If so, switch the resolution to 720p.
I wondered the same question when setting up the player for my dad (720p Samsung DLP). I decided to leave the player set to 1080i since it would require less processing at the player (1080p24->1080i60 rather than 1080p24->1080i60->1080p30->720p30 although I'm just assuming this is the algorithm based on how it does 1080p30) and let the TV handle the rest of the conversion. I think it really depends on how good the set is at video conversion though.
Is the video encoded in 1080p or 1080i on the disc? I have an A3 HD DVD player, and it's only good for 1080i. Is it interlacing the 1080p on the disc or playing native 1080i on the disc? I have a Pioneer 6070 which is a 768 display. It has a great scaler in it (so much so that I have opted to keep using my Pio SD DVD player for SD DVDs at 480i). So would I be better off if the video is encoded at 1080p to have the A3 interlace it and then have my display de-interlace it and then scale it down to 768? Or would I be better off having my A3 scale it down to 720p and my TV upscale it slightly to 768p and no de-interlacing or interlacing performed at all???