Q: Should I upgrade to lion to get Xcode 4.6?

We also have an Early Intel iMac running Snow Leopard and while it is still a great computer (for the grandkids and guests to use) it is not going to get you where you need to go.

Personally I think that you would be better off, selling or passing it on to another family member and getting a late model iMac or Mac Mini.

Mac - Shop MacBook & Mac Computers - Apple Store (U.S.)

Refurbished Mac Computers - Refurbished Notebooks & Desktop Computers - Apple Store (U.S.)

Not without knowing exactly which white Early 2006 Intel iMac you have..? The white polycarbonite models were only made in 2006 and some were only Core Duo's that can not go past Snow Leopard.

How to identify iMac models

If you have a 20 or 24" Core 2 Duo model? Then yes it will run Lion, but you will however want the maximum 4 GB of RAM before upgrading.

iMac: Memory specifications and upgrades

Lion is a bigger RAM (memory) hog than Snow Leopard.

2GB of RAM might cut it, if you have plenty of free HD space and do not run more that a few Apps at the same time.