7.6.1 will be just fine on max RAM and an 040, and is probably the best OS, both for that machine and for what you want to do. You can always trim the boot INITs to make the system use less RAM, with Extensions Manager, Symbionts, or Conflict Catcher. And I'd suggest grabbing the free upgrade for Open Transport from Apple.
Networking -and- playing mp3s is a lot to ask of the old beast. A nice lean boot would probably help, as would having the fewest impediments between the Mac and your modem. Are you using CommSlot ethernet?
Check out System Seven Forever for more hints and tips. And mpegdec's website will tell you what kind of performance you can expect on the 040. You might have to go down to mono, or a lower bitrate.
IPalindromeI wrote:a 486SX won't work for this, so a DX or DX2, if possible.
Could be wrong, but I don't think the DOS card's CPU is socketed.