I call [censored]. Your FPS drops in cities because your CPU is the bottleneck and you increased the graphical settings further bottlenecking the CPU. As far as the "smoothness" it would actually be less smooth since the difference between average, max and min frame rates would be greater. Periods of 60fps (Vsync cap) and then 40 fps as you mention is not "smooth".
I used to have a HD 4850. I'd run on high, and get 30-40fps outside and in cities. Now with my GTX 560Ti, I get 60fps outside and 40-60fps in cities. It's common sense that upgrading my GPU is going to mean I get better FPS in terms of the graphical part of the game. My CPU is still a bottleneck, like it is on every Bethesda game with almost everyone. But my FPS has improved dramatically all round.
You don't want to believe that, then I really don't care. I'm just stating my experience.