I have a Apple iMac "Core 2 Duo" 2.0 17

You should be able to install Snow Leopard directly from the retail disc. Beyond that you haven't provided enough information to comment.

Does that happen when you select the hard drive as a destination in the installer? Or somewhere else?

Take a look at this article and see if it describes what you are looking at:

"You cannot install Mac OS X on this volume..." alert in Installer - Apple Support

Are you sure:

1. The drive is properly partitioned and formatted.
2. You need to erase the drive before you can install Snow Leopard.
3. You really have an Intel iMac model with Core 2 Duo processor.

Be sure you are trying to install Lion. That is the latest version of OS X your machine can handle. Were I you I would stick with Snow Leopard. But you will need the installer DVD:

You can purchase Snow Leopard through the Apple Store:Mac OS X 10.6 Snow Leopard - Apple Store (U.S.). The price is $19.99 plus tax. You will be sent physical media by mail after placing your order.

After you install Snow Leopard you will have to download and install the Mac OS X 10.6.8 Update Combo v1.1 to update Snow Leopard to 10.6.8 and give you access to the App Store.

Snow Leopard General Requirements

1. Mac computer with an Intel processor

2. 1GB of memory

3. 5GB of available disk space

4. DVD drive for installation

5. Some features require a compatible Internet service provider;

fees may apply.

6. Some features require Apple’s iCloud services; fees and

terms apply.

Once you have the DVD then do the following:

Clean Install of Snow Leopard

1. Boot the computer using the Snow Leopard Installer Disc or the Disc 1 that came

with your computer. Insert the disc into the optical drive and restart the computer.

After the chime press and hold down the "C" key. Release the key when you see

a small spinning gear appear below the dark gray Apple logo.

2. After the installer loads select your language and click on the Continue

button. When the menu bar appears select Disk Utility from the Utilities menu.

After DU loads select the hard drive entry from the left side list (mfgr.'s ID and drive

size.) Click on the Partition tab in the DU main window. Set the number of

partitions to one (1) from the Partitions drop down menu, click on Options button

and select GUID, click on OK, then set the format type to MacOS Extended

(Journaled, if supported), then click on the Apply button.

3. When the formatting has completed quit DU and return to the installer. Proceed

with the OS X installation and follow the directions included with the installer.

4. When the installation has completed your computer will Restart into the Setup

Assistant. After you finish Setup Assistant will complete the installation after which

you will be running a fresh install of OS X. You can now begin the update process

by opening Software Update and installing all recommended updates to bring your

installation current.

5. If you are planning to sell or give your computer away, then do the following:

After you reformat your hard drive and reinstall OS X, the computer restarts to a

Welcome screen and asks you to choose a country or region. If you want to leave

the Mac in an out-of-box state, don't continue with the setup of your system. Instead,

press Command-Q to shut down the Mac. When the new owner turns on the Mac,

the Setup Assistant will guide them through the setup process.

Download and install Mac OS X 10.6.8 Update Combo v1.1.