iMac wont startup and won't boot from CD
From what you describe, your internal hard drive failed, which will require a replacement;  since you have an iMac, I suggest that unless you’re very comfortable using a variety of tools and have time, let Apple do it for you. In any case, what you can try to do is, connect an external USB/FW drive and try to install into that drive. 

The fact that your drive doesn’t want to boot from the DVD is intriguing if anything, but the DVD may be crashing when reading the “broken” drive. It’s rare, but it could happen. Do you have any other Mac to “clone” into an external drive and try to boot from there? 

Since it’s an iMac, your best bet is to remove the internal drive and proceed from there. The problem is that removing the drive is a painful operation. 

Best idea: go to an Apple store or certified shop. They have the tools and the spare parts to better diagnose the problem.