IMac won't boot if external hard drive running Time Machine powered on

Question

Upon rebooting, my iMac 3.06 GHz Intel Core 2 Duo with 4GB RAM, running OS X 10.5.4, locked up in a gray screen, the "gray screen of death."
At the recommendation of the Apple Tech Support rep, I turned off the iMac using the power button, and rebooted with my USB and Firewire devices removed.
The iMac boots fine with everything except my G-tech drive 1GB external hard drive running Time Machine with no partitions, attached using a Firewire 800 cable.
If the external hard drive is on, I get the interminable gray screen.
If I boot with the external hard drive powered off and then power it on after I'm at the Mac desktop, the disc image mounts normally on the desktop.
I've already repaired all disc permissions and it doesn't help.
My external hard drive has used 907 of the 931 GB true capacity. Supposedly, Time Machine removes the old files to make room for the new files.
Time Machine itself is running properly once I get my iMac booted in this peculiar way.

Answer 1

Raja,
Do a SMC reset perhaps even a couple of times and see if that helps. Also in System Preferences + Startup Disk make sure the internal HD is selected.
SMC RESET
Shut down the computer.
Unplug the computer's power cord and all peripherals.
Press and hold the power button for 5 seconds.
Release the power button.
Attach the computers power cable.
Press the power button to turn on the computer.
PRAM RESET
Shut down the computer.
Locate the following keys on the keyboard: Command, Option, P, and R. You will need to hold these keys down simultaneously in step 4.
Turn on the computer.
Press and hold the Command-Option-P-R keys. You must press this key combination before the gray screen appears.
Hold the keys down until the computer restarts and you hear the startup sound for the second time.
Release the keys.
Roger