Speed: The 2006 Mac Pro 2.66 is about as fast as a 2011 MacBook Air. With an inexpensive CPU upgrade (e.g. x5355) you can transform it into an 8-core machine roughly comparable to the performance of a 2011 iMac (provided the software is multi-core aware).
OSX 10.8 Mountain Lion: While not officially supported on a 2006 MP by Apple anymore, ML is actually running flawlessly on a 1,1 if booted in "Legacy Mode" (Chameleon-type bootloader). Kind of using it as the most compatible Hackintosh you could ever get. Will probably run ML much smoother than an old 2008 iMac... Apart from that SnowLeopard is a well refined alternative on the MP and for people wanting iCloud support Lion is officially supported as well.
Graphic Card: While the 5770 is running fine in the 1,1 (despite Apple officially only claiming compatibility for later Mac Pro revisions), the Apple variant is a bit expensive and a PC 6870 is a good (and cheaper) alternative and supported natively with OSX 10.6.8 or later (without flashing). Performance is close to the 5870, power consumption and heat dissipation a fair amount lower.
Issues on a 1,1: No boot screen (mitigated by a second compatible card) and neither original Apple DVD player nor Steam games are working (mitigation: ATY_Init.kext).
Price: No way a 2009/2010 Mac Pro would currently be available under $1000!
iMac vs MacPro:
- Mac Pro allows easy upgrading of all major components, the iMac does not.
- Mac Pro does still handle most of today's tasks (except for very demanding video or photo work and scientific calculations) very fine, the iMac not so well (and if so, it probably runs hotter and thus louder).
- MacPro needs more space (under the desk) than the iMac.
- MacPro allows for bigger and multiple external monitors.
- Under idle or low load conditions the iMac is nearly inaudible, where the MacPro has a quiet, but noticeable ambient noise. Under high(er) load that is reversed and the MP stays much quieter than the iMac.
- Ram is more expensive for the Mac Pro than for the iMac. How much Ram would come with the MacPro in question? 4-8 GB Ram is recommended (especially with Mountain Lion). The early 2008 iMac is limited to 6GB Ram (officially only 4GB).
Conclusion: When asked to choose between the two computers mentioned, i would take the MacPro without thinking twice - especially as both cost the same and the OP having a 32" TV as monitor would take the additional expense for a monitor on the MacPro out of the equation.