For my boat, I did four coats on the bottom and five coats on the deck (for extra protection from the hot Texas sun). I found that 320 or 400 between coats was absolutely fine (IF you're careful to keep your varnish uncontaminated — see my earlier posts...).

Unless you're in the mood to spend a LOT of time hand-sanding, 320 grit (dry) is about the finest, easily obtainable pad for random orbital sanders. If you use a light touch and slow down the orbital speed, it can do an excellent job. (A few speciality wood shops have much finer pads, but they're pricey and clog MUCH more quickly. IMHO, you're much better served by buying a truly excellent varnish brush.)

Update: I was able to launch my Chesapeake 17 this weekend and paddled it for a couple of days...it was nothing but wonderful...tracks great, turns easily, dry in moderate chop, etc. I must have had a dozen people come up to me to ask what kind of wood I used, how long it took, how difficult it was to build...NOBODY has ever done that with my bright yellow rotomolded kayak :-)

Build on!!