Data recovery on Lion with a disk that disk utilities cannot mount?
Reinstalling Lion won't necessarily save your data. It sounds very likely your hard drive was failing (disk access substantially slower than normal can be a symptom of failed reads and/or the drive attempting to recover), and it died during the defrag.

The USB drive is only used to install Lion (just like a DVD), not to transfer any of your existing data.

Your next step should be seeing if you can mount the drive on someone else's computer, either via Target Disk Mode, or taking the drive out and putting it in an external enclosure. However if the recovery mode can't mouth the drive, chances are another computer can't either.

It's hard to say for sure without more information, but at this point it's likely your best bet for recovering your data is having good backups. Failing that, there are data recovery services, but they can be extremely expensive.