Disk Warrior says I don't have enough contiguous free space.

I am having much trouble with my iMac (17 inch iSight, 10.4.11, 160 GB HD, 2.5 GB RAM) lately. Recently I posted some symptoms (freezing, odd patterns on menus, icons and in the dock) in the iMac PPC forum: Strange Background Pattern on Icons, Menus, etc. (no answers as of today). As of this morning, on restart the computer has been unable to get past the blank blue screen.
I tried to repair the disk with Disk Utility, but the problem persisted. I started up in Target Disk Mode and ran Disk Warrior via a Powerbook G4 (the iMac kept ejecting the Disk Warrior CD). At the end of the process, the report said, "There is not enough contiguous free space for a fail-safe replacement of the directory. It is highly recommended that you create 197 MB of contiguous free space before replacing the original directory."
Well, a "fail-safe" replacement is certainly what I want. The iMac's Hard Drive is the original 160 GB, which is really 149.1 GB, according to disk utility. Free space is 29.46 GB (I try to keep it from going below that), which is 19.75% of the total. I don't get why, with practically 20% of the disk free, and OS X's efficiency in dealing with file fragmentation, there aren't 197 Megabytes in a row somewhere in there. But my "getting it" is unimportant. What is important is replacing the directory to see if it allows me to boot from the internal drive, and hopefully cures the other ills in the process.
I was under the impression (based on other discussions here) that I shouldn't need to defragment the disk as long as I keep about 20% of it free. Is it safe to replace the directory anyway? I have no defragmentation application on hand. Should I get one? If so, which one(s) would you recommend?
Any and all suggestions welcome and appreciated.
Thanks.
Leonard
p.s.: What happened to the "preview" button on this form? It sure would be nice to see this before it's posted.

I have been running the iMac from the external drive. The strange patterns and freezing problems continue.
After the first freeze of the morning, I forced shutdown then started up again (I've been running from an external clone that I backed up from the main drive using BDAqua's instructions). When the iMac finished starting up, the menubar clock had the right day and date, but the wrong time; I checked Date & Time preferences and the 'Set date and time automatically' box was unchecked, so I checked it, but nothing happened. I checked the time zone and it was set to GMT. I had previously set it to Eastern Time. I set the time zone correctly and checked the box again, but nothing happened. I unchecked the box and set the time manually. Then I checked the box again and it reverted to GMT, so I set it manually again.
I opened Lighroom (I had been working with it earlier in the day) intending to print some photographs. A new collection I had just made an hour before was gone. A different collection that I had deleted during that first session was back. However, I am not certain that I closed Lightroom before the last freeze, so it's possible that the changes I had made were not saved.
I restarted again (iMac, again booted from the external drive). Time wrong again. That problem could be the PRAM battery. Those have lasted about five or six years on my other computers, so probably I'm due for a new one). Unfortunately it's nearly impossible to get to the battery on an iSight G5 iMac. Harder even than swapping out the hard drive. But a dead battery wouldn't explain all the other trouble.
As I said in reply to rccharles' suggestion about doing a Safe Boot, in that state the computer does not freeze, nor do those patterns I referred to develop. I did the backup while in Safe Mode. I'll have to see whether it will allow me to print from Lightroom. It would be quite frustrating to have it freeze in the middle of making a photograph.
Sometimes on restart the patterns are there, sometimes they're not, though they WILL develop. Sometimes I can work for an hour; sometimes the iMac crashes in twenty minutes or less. It's completely unpredictable.
I just repaired permissions on both drives and will do a PRAM reset (already did that this past weekend). I'll try to do some work later and see how it behaves.
Thanks again to everyone for the suggestions.
Leonard

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