ASP.NET 3.5 difference between create new project and new website?

depends. most people conisder a different domain with different content a new website. if it has the same content its just a redirected site.

a single domain can have multiple applications (IIS's term). each app has its own virtual directory (usually its own actual subdirectory too)

mostly I use a single project to develop an entire site, but you can open a single application if needed
 
A new project is a Windows based application (either winforms or a console application) whereas a new website is an Asp.net website. You can create both types using any of the .net supported languages.
 
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