"Simple" answer - depends on your graphics card and graphics driver version. If you're running a TNT2 with an early driver, DX 6 or 7 are fine. If you're running a FX 5900XT with forceware 5x.xx you'll want DX8. Without DX8 installed you might not get direct 3d hardware acceleration depending on your driver.
I stumbled upon this issue a month ago when setting up my "HP" Vectra 420 (... actually an empty vectra case and PSU with an Asus P4p800-VM + P4 2800 1MB and the stock cooler that came with the vectra - the vectra's original motheboard died). I use a low profile FX 5700LE in the PC and it dual boots XP and 98.
At first I didn't want to install DX8 - I wanted to stick with DX7 witch is needed for one of my games, but the nvidia driver I prefer using with windows 98 for FX series cards (44.03) would not detect my GPU. So I went with the earliest driver that did - 56.64. Turns out that while 44.03 works fine with DX7 only, with 56.64 I couldn't get Direct 3D until I installed Direct X 8.1. Mechwarrior 3 would not detect my graphics card, and DXDIAG was displaying "Direct 3D Acceleration: Not Supported". After installing DX 8.1 everything was working as expected.
It also depends on the rest of your system. I installed DX 8.1 on my K6-2 400(66x6) / Via VPX build to test out an FX5500 PCI and it slowed everything down drastically. Boot times tripled and the PC was sluggish overall. To fix this I decided to go with a Voodoo Banshee PCI and DX 7, since none of the games that can run well on that PC require DX8, and the PC is a lot snappier with DX7.