76 two pair, beaten on flop?or not

[Briman51]

So I'm in a $0.05/$0.10 NL Holdem game, which isn't particularly loose. I haven't noticed Villain bluffing yet, or playing weak hands, he hasn't really been involved.

So here's the hand:

Total number of players : 8
UTG( $21.95 )
Seat 4( $24.43 )
Seat 3( $17.34 )
Hero ( $18.6 )
Cut Off ( $5 )
Button ( $11 )
<font color="red">villain </font> = Small Blind ( $14.25 )
Big Blind ( $2.02 )

PreFlop ($0.15):
UTG limps, seat 3 folds, seat 4 folds, Hero (7[img]/images/graemlins/club.gif[/img]6[img]/images/graemlins/diamond.gif[/img]) raises to $0.40, cut off folds, button calls, <font color="red">villain </font> calls, big blind calls, UTG folds.

[So four of us take the flop]

it comes...6[img]/images/graemlins/heart.gif[/img]J[img]/images/graemlins/club.gif[/img]7[img]/images/graemlins/spade.gif[/img]

Flop action ($1.70):
<font color="red">villain </font> bets $0.5, big blind folds.

[What's my action here? I feel his most likely holdings are KJ or AJ]

Hero raises to $1.50, button folds, <font color="red">villain </font> reraises to $3.50.

[What do you think he most likely has at this point? What line do I take?]

Hero calls.

The turn comes 2[img]/images/graemlins/spade.gif[/img].

Turn ($8.70) action:
<font color="red">villain </font> bets $5.00.

[At this point I couldn't think of a single hand I could legitimately beat]

What do I do?!?

Any input would be great, cheers guy, Briman51