Mac Mini (Late 2009) - Recommended OSX Version for it?
The answer to your question, in short: It is always advised that you have the latest possible OS for your computer. This is due to the myriad of bug fixes and security patches that come along with new OS updates and intermediary releases.

I would suggest bumping up the RAM to the highest possible as well, but at least to 4GB. This should result in an immediate performance boost and result in smoother system operation. Switching the HDD can also help, but is less urgent.

If all else fails, you can always try restoring the operating software to a new state. Often, systems will change over time and become loaded down with old/unpatched/inefficient software and/or changes made to files that result in degraded performance. A new clean wipe will ensure you are running the best software available for the machine.