Nothing you said would indicate a power supply problem. The hard drive does sound like it's terminal.
If you're not comfortable installing a internal hard drive, another option would be to go with an external. I would recommend a Firewire external drive. http://www.ifixit.com/Apple-Parts/Firewire-SATA-Hard-Drive-Enclosure/IF107-055 Here are some drives to put in it: http://www.ifixit.com/Mac-Parts/iMac-Intel-17%22#0-Hard+Drives+SATA+
Use SuperDuper, http://www.shirt-pocket.com/SuperDuper/SuperDuperDescription.html (the free version for your needs). Use this to duplicate your existing drive. Then go to system preferences - startup disk, and select the new external.
Your other option of course is to replace the internal drive. Here's how that's done: http://www.ifixit.com/Guide/Repair/Installing-iMac-Intel-17-Inch-Hard-Drive-Replacement/891/1
You can use an adapter: http://www.ifixit.com/Guide/Repair/Installing-iMac-Intel-17-Inch-Hard-Drive-Replacement/891/1 to plug the new hard drive into to duplicate your data.