Lion iMac won't boot and can't re-install OS as disk locked.

Hi, my iMac was purchased in 2011 and is running Lion, Mac OS X 10.7.5.
On Monday it stopped booting and gets stuck at the apple logo and spinning thingy.
I have tried to Verify and Repair the Macintosh HD disk but both fail. Next step I wanted to try was to re-install the OS which I understand will keep my settings and data. When I go into this option the disc is greyed out and it says "The disk is locked".
Do I need to unlock the disc, if so then any ideas how I do this ??
What other diagnostics should I try ??
Many thanks in advance for help.

When you try to install and check your hard drive, and you starting the computer from the recovery partition.
Restarting your computer by holding down the command + R, Additional if you have access to DiskWarrior you should give that a try to repair your hard drive. 
Take a look at this link, http://www.apple.com/support/imac-harddrive/

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