I am going to suggest that you try to sart in SAFE MODE. You can do this by restarting and holding the SHIFT KEY down while it restarts. This may take a few minutes so be patient, since part of the SAFE MODE boot involves running diagnostics which are invisible to you but still must complete before the machine boots up.
[More about SAFE MODE: http://support.apple.com/kb/ht1455 ]
If your display remains fuzzy and poor after booting into SAFE MODE, then I think you will ultimately have to take your machine to a repair shop that is familiar with Mac repairs, but I expect that the cost of repair will be more than a new Mac would be.
If the display seems good after the SAFE MODE boot, then I expect that your advanced graphic circuitry has failed. SAFE MODE boot does not activate certain advanced graphics. So if things look clear, that means that the advanced graphics has failed or worn out, but the lower end graphics is still working, There may be a way to continue to use the computer without activating that advanced graphics circuitry. An example of how that was done is shown in this link, which was for a different model of Mac than yours, but might be a rough guide for how you could do something similar:
https://discussions.apple.com/thread/3621709?tstart=0 (Don't follow the specific instructions in this link because they are for a different Mac model than yours, but they illustrate how one can continue to use a Mac without the advanced graphics after the advanced graphics have failed.)
For now, I suggest the SAFE BOOT and report back as to whether that resulted in a clear screen/display before you do anything else.
If an external monitor works well, then yes, that would mean your built in monitor failed. Otherwise, your graphics hardware has failed, that's the graphics hardware that drives the monitor; either way, it would be expensive to try to fix, especially on an older computer. DIagnosing these things via the internet is not the best way; if I were you, I would take the computer to a good Mac repair shop and see what they suggest.
Did you ever solve this problem? I started a new thread on a very similar problem:
FWIW, I posted this message in hopes that John has email notification for posts in discussion threads that he has posted to. And hoped to get a reply from John.
All others, please ignore. Or answer the question, if you can, LOL.