I'm going to say definitely. We'll see much better looking games on both PS3 and 360 before the end of this generation.
Aside from tapping the full power of both consoles, game engines will also become more refined leading to better performance for less burden on the hardware. I'd say that Gears 2's graphical improvement over gears 1 is more due to the refinements of the Unreal III engine as opposed to epic tapping alot more of the 360's power.
Anyway, the game I predict that'll do it is Uncharted 2. I think Naughty Dog will tap more power out of the PS3 (it has been 2 years after all), but more important than that, simlarly to epic and Unreal III, I think that the refinements to the engine will be the major source of the improved graphics. But to be honest, I think Uncharted 2 will be a minor leap over KZ2 graphically BUT be a much more fluid experience throughout. (or at least I hope so, I'd rather a slightly better looking game that performs the same throughout then one that looks way prettier but has faults that ruin the immersion factor).







