HELP-My new iMac won't re-install OSX +

I have had a new iMac 21 with i3 and 500gb hard drive for 3 months, but recently had a few minor problems.
I did an Onyx scan which told me that the disk was in need of repair, so I had backed-up all my files and data and applications to an external hard drive just in case.
I then used the Migration Assistant just to do a double check but gave up on it when it spent aeons trying to calculate the size of my music, film and photo files to transfer!
Then - without doing anything, although I intended to do a clean install with the original supplied OSX and Apps. disks - the machine switched to a small window asking for my password - which it then refused to accept - even though I know it was correct etc
I have left it switched off for about 5 days and tried again this morning with the same result.
Anyone got any ideas what is wrong - and how I can successfully re-install OSX from the disk ??
As I bought a new iMac27 with i5 a month later, I may have mistakenly inserted that Install disk which is a later version being 2011 instead of the iMac 21's 2010 version - so when I held down key C I am allowed to start the installation process, but then get a message saying -'It is not possible to upgrade this version of OSX .'

Do you have the original OS disk (s) that came with your 21 iMac? If yes then insert Disk 1 and use it to start up from. Then Repair the HD using Disk First Aid but do not reinstall the OS - yet. If the repair of the HD goes as expected you will be good to go. If you get HD errors that cannot be repaired then try formatting and reinstalling the OS. Worst case is the HD is damaged and if under warranty will be repaired.

By 'Disk 1' I assume you mean the OSX Disk ?
If so - it only loads if I press down ' C '- and then the above non-starter procedure happens !

Any one else - PLEASE ?!?

Only one reply - experts ?!

I am absolutely staggered at the lack of response to this problem !

1. Boot up your 21.5" iMac
2. Insert the OS X disk (the one that came with your 21.5" iMac)
3. Restart your iMac
4. Hold down the C key immediately, and keep it pressed until your iMac boots from the DVD.

Do Step 4 again - instead, hold down the Option Key.