Can I create MacOS on flash drive to run broken Imac?

So I've got an Imac that's all brokedy. Won't start up. I tried reinstalling Snow Leopard 10.6.7 on it from a boot disk, but got referred to Disk Utility. Disk Utility told me that the GB 500 drive was so fricked up that Disk Utility can't do a thing with it, I have to take it to a repair shop. But the Apple MacIntosh HD that's INSIDE the GB500 drive checks out OK according to Disk Utility.
It occurred to me that I could maybe install the Snow Leopard software into a flash drive and run the computer off of it, accessing the data and software on the MacIntosh HD via the flash drive, and at least being able to salvage important files that way. I'll need at least a 16 Gig flahs drive for that, no biggie, but my question is: is this feasible or some mad fantasy I've created out of an absurd desire not to get my wallet hijacked by Apple?

I think you'll find that your Hard Drive is failing, I hope you have some form of backup.
Your idea of creating a bootable flash drive could work but it will be useless if your HDD fails which according to your SMART status could happen soon.
I would make a full backup of your hard drive onto an external hard drive using Time Machine or another preferred backup method.
Then I would look into replacing the drive by myself or taking it to an Apple Store.
Good Luck!

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