Problems updating to Lion

I'll try to simplify this as much as possible but I'm really stuck on where to go with my macbook.
I have a 2008 13 inch macbook that came with Leopard. I updated to Snow Leopard a few months ago and noticed that I started getting the spinning wheel a lot and a slight slow down in performance. After backing up with Time machine, I decided to go ahead and upgrade to Lion.
I installed it and tried to use Migration assistant to bring in all my "goods", i.e. photos, music, but it is telling me that I don't have enough room to do that.
I have a 250 GB hard drive but only 17 GB is now available and I can't figure out where to go from here. To make things worse, my external hard drive seems to be on its last legs and sometimes doesn't mount. So I'm very worried that its going to crap out on me.

Where should I go from here?
I considered just trying to do a clean install of Lion and go from there but not really even sure how to do that...Ie do I start with my recovery disk then install snow leopard, then install Lion?

Any help would be appreciated.
Thanks

The reason your MacBook started to slow down was not Snow Leopard, it was the lack of hard drive space. Lion is larger and uses more resources than Snow Leopard so be prepared to do some upgrading of memory and the hard drive if you have not already planned on it.

To answer your question... Reboot the machine and hold down the option key. Select the Recovery partition, select Disk Utilities, erase the drive, and reinstall Lion clean. Make sure you have a good Time Machine backup to migrate your data before doing so. If your external hard drive is flakey, buy a new one and use it instead.