the grade of the sandpaper is an issue, but not as much as how much pressure you use. 100 grit should be fine. The "lightly" is so you do not sand it off in some spots and have to recoat again. Basically you are putting a new layer of wall on so that its all even and you can paint it.
DO not use a palm sander or other power tool. It will come out much better if done by hand.
Dust will be an issue - wear a mask and have proper ventilation/air flow while sanding and be prepared for some serious dust. (just so you aren't surprised)
Its a PITA to put the spackle on at first, but once you get the hang of it, it goes rather quickly. Use a large blade - 12" minimum.
Oh, and DO NOT USE the lightweight stuff - it will not work. Get the big bucket with the blue lid.
I had to do this in a couple small rooms in my house - one which had a crappy faux paint job.
Before/after pics required. Good luck.
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"like strapping a pillow on a bull in a china shop" Bullitt
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