While I agree with the dry sanding as the best way to finish bondo, I highly recomend using increasingly finer grits before applying any paint. I agree that 120-180 grit is good for the initial and rough work but to get a good finish finer paper should be used. Use 220 before priming and when using spot putty. You should finish off with 400-600 grit paper as a final prep before painting, and don't forget to use a tack cloth to remove the superfine dust from the area to be painted otherwise you'll get lumpy paint.
Good luck.
