Hmmm... perhaps you have set your display to "mirror"... in that case then the external screen resolution will not be able to be larger than the native resolution of the laptop screen, hence 1680x1050. The external will then indeed look blurry. Set up the new screen as a secondary, not mirrorred, monitor... and slide it up to its native HD resolution.
God knows where you change this on a Mac.
I think this might be the problem, now that you mention it.