"Are you suggesting that I connect an external HD to a MacBook and install the OS to that device?
Even if that works, will an iMac be able to boot from it and run properly?"
I'll tell you what I'd try next.
I don't know if you have the resources with which to do this.
I would go to ANOTHER, working Mac.
I would then take
an external hard drive and install a clean copy of the OS onto it.
I would use ANY version of the OS that can boot the "problem Mac". Preferably it would be a version that could boot BOTH MACS.
I would set up the external drive with a "temporary administrative account".
By that I mean it would be an account that could be deleted later on if need be.
I wouldn't install ANY additional software to it yet (with the exception of CCC, read on).
I would get it "bootable on the second Mac".
Once I know the drive is "bootable to finder" (it MUST BE bootable "to the finder", and NOT to just "the OS installer"), I would download CarbonCopyCloner from here:
http://www.bombich.com/download.html
(there are several versions available, download the one pertinent to your needs)
Now....
I'd take my "known bootable" external drive and connect it to the "problem Mac".
Press the power on button and immediately hold down the option key and keep holding it down until the startup manager appears.
Then, IF the external drive shows up as a bootable option, select it with the pointer and hit return.
Does it get to the login screen?
Does it get to the finder?
IF I got it booted up, I'd do this next:
I'd open Disk Utility and ERASE the internal drive. I'd NUKE IT BACK TO NOTHING. Mac OS extended with journaling enabled, GUID partition format.
The internal drive should now be "empty", in HFS+.
Next, I'd open CarbonCopyCloner.
I'd accept all of CCC's defaults.
I'd select the EXTERNAL drive as my source, and the internal drive as my target.
Then, I'd let CCC do its thing.
CCC will probably ask if you wish to clone over the recovery partition as well.
GREAT! This is just what I'd do. CCC will add a recovery partition and put the necessary software onto it.
When CCC is done, I'd power down, all the way off. I'd disconnect the external drive.
Then, I'd press the power-on key and IMMEDIATELY hold down the option key and keep holding it down until the startup manager appears.
If the internal drive is there "as a bootable drive", I'd select it with the pointer and hit return.
Now....
the moment of truth.
Does the internal drive boot up to login screen?
Can you enter a password and get to the finder?
If it does, THIS IS WHAT WE WANT.
I'd next open System Preferences/Startup disk and re-select the internal as the boot drive.
Then... I'd power down all the way off, and press the power on button
Can you login and get to the finder?
If so....
DONE.