Can I use iMac as wireless access point?

My network equipment: ADSL modem (which has no integrated wireless) with Buffalo AirStation (802.11b) wireless access point
I have had a reasonably stable broadband situation for a long time (hence the ancient equipment!) and have been able to access the internet via my ADSL modem/ethernet router using ethernet wires from my iMac G5, and two desktop PCs running Linux and Windows. I have also been able to access via the wireless Buffalo Airstation on various laptops over the years. My wife's brand new MacBook has been connecting wirelessly for a couple of weeks.
Until last night...
Then the AirPort signal dropped to zero and a neighbour's network was suggested as the network I need. I looked at the Buffalo Airstation and there was a flashing red light (and flashing green ones as well). Being an experienced chap I turned it off and turned it back on! For about five minutes the Airport signal was back. Then it disappeared with flashing lights as before. Repeated a few times with no change...
I don't know if the problem is related to the neighbour's wireless signal or not but I decided that it could be the AirStation getting flaky so I tried creating a network on the iMac with a view to sharing its wired connection.
I can log on to this iMac network from the MacBook and I have changed the Systems Preferences to share the connection on the iMac but the MacBook says it is not connected to the internet. Anyone got any ideas what I might be doing wrong? Should I be entering the ADSL modem router in the internet connection details (which is what I have done) or should I be entering something else?
Is what I am trying to do even possible? I haven't found any exact parallels in the documentation or the forums...
Any help greatly appreciated!

Does the Buffalo AirStation allow you to change the channel being used?
You can share an Internet connection over Ethernet to other computers using Airport. You set it up in System Preferences Sharing pane Internet tab (if using Tiger). On the MacBook, you should just use the default +Configure Using DHCP+ setting. Be sure you clicked to Start the sharing on the iMac. On the MacBook, be sure you select the wireless network that is the iMac's name.

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