Xcode wont install. Upgrade to lion?

Hey!
I have a MacBook pro that is currently running Mac OS X v10.6.8 (Snow Leopard). I need to download Xcode and have found the older version of it that is supposed to work on this version from the apple dev website. I get up until the actual "install" button in the installation wizard and it says this:
"The installation failed. An unknown installation error has occurred. The Installer encountered an error that caused the installation to fail. Contact the software manufacturer for assistance."
When I enter the PDF file that came with the download, it tells me that this is Xcode 3.2.6 for Max OS X 10.6 and iOS 4.3. I am unsure as to why it is not installing. There is more than enough HD space.
Do I have to upgrade to 10.7.4 (Lion) before I can use Xcode?
If yes, how exactly do I go about upgading to Lion? Does it cost? How much? Will it wipe my HD?
It is imperative that that last question is correctly answered because it is not just my laptop, it is shared with someone else.
Please help me ASAP as this is a rather urgent matter.
Thanks in advance,
Daniel.

Welcome to the Apple Support Communities
I recommend you to upgrade to the most recent OS X version, so you will be able to make applications for OS X Mountain Lion and Lion, too.
The upgrade to OS X Mountain Lion costs $19.99 in the Mac App Store, so the first thing you have to do is to check if all your apps are supported > http://www.roaringapps.com
Then, open App Store and purchase Mountain Lion. While the Mountain Lion installer is downloading, you can make a Time Machine backup and/or a clone with Carbon Copy Cloner
When the Mountain Lion installer has downloaded, the installer will appear, so follow the steps to upgrade to Mountain Lion. After upgrading, open App Store and download Xcode 4 for free.
The hard disk won't be wiped because of upgrading Mac OS X, but as I said, you must make a backup of your files

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