Welcome to the Apple Support Communities
It looks like the hard drive is damaged. Follow these steps:
1. Insert the Mac OS X DVD that came with the Mac, and press C key while your Mac is starting.
2. When the disc has started, go to Utilities menu > Disk Utility, select Macintosh HD on the sidebar and verify the disk.
3. If it shows a problem, repair the disk. If it can't be repaired, take the Mac to an Apple Store to get the hard drive repaired.
If you bought your iMac between October 2009 and July 2011, you must know that there are some iMacs with defective 1 TB Seagate hard drives, and Apple is replacing those hard drives for free. Check if your iMac is eligible > http://www.apple.com/support/imac-harddrive