Definatly Sub Domain.....or Domain Forwarding/Aliasing. That way you can keyword your domain name to the blog subject, always a plus.

But hosting is pretty cheap, if you have two blogs of similar substance generating from the same IP address one is likely to be frowned on by the Big G
If you can afford it, I'd just rehost.

I know you see all those MB sitting there wasted in the hosting plan

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