Failing OS X Lion installation (in loop, no control)
You should be able to boot to your external Lion disk by holding option/alt at startup to bring up the boot selector, and then selecting your external disk. Once booted, I would then proceed to erase the internal disk with Disk Utility and create a single partition, selecting GPT as the partition type and Mac OS Extended (Journaled) as the format type. If you want to be really thorough select the zero-fill option when erasing the drive, it may help if you still have issues with creating the recovery partition as it will check every sector on the drive and reallocate any it finds to be unreliable.

While you're at it, make sure the SMART status of your drive is okay - it's not a guarantee your drive doesn't have any physical issues but it's a useful warning of impending failure.