New hard drive not recognized
The problem was related to difference in sata ver.
The hdd is sata2 whereas the macbook (mid 2007) supports only sata1 (1.5G).
Normally, these should work since autonegotiation should set it to sata1. Unfortunatelly, it didn't.

I had to use Patch  to flash the hdd's firmware and set it hard to sata1.
After burning cd, rebooting (hold c to boot from cd), you execute run.bat which does the job.

Then I had changed the cd to dvd installation disk with 10.5. 
The disk was visible under the diskutil.
I created partition and rebooted again.
Afterwards the hdd was visible when restoring time machine backups.