Video doesn't work on iMac Intel 24''

Hello - I sure hope there is some AppleWiz on line who has any idea how to get me out of this predicament!

Started a few weeks ago, when I was playing the Mac version of Civ 5. The computer started freezing and the only way out was to cycle the power button. Did that a few times, then the computer stopped booting at all - it would stop at the grey Apple logo with the spinning wheel freezing at some point. Thinking that I had corrupted some system files by abusing the power ON/OFF, I bit the bullet and reinstalled Snow Leopard from scratch. No biggie, an evening's worth of work with no data loss.

About a week ago, in my infinite wisdom, I decided to try playing Civ 5 again, only (after having this recommended to me by Aspyr tech support), decided to lower the resolution and the graphic settings to give it a chance to play smoothly. Changed the game resolution to something like 1024x768. Computer froze again, couldn't move the mouse, couldn't ALT-TAB or CMD+Q my way out of it. Hit the power ON/OFF button again. Computer has the same problem, stuck at the grey Apple and spinning/freezing wheel. This time around, I try to connect from my Macbook, using Screen Sharing. No problem, I can log in and do whatever I want on the iMac. So it is running, just not displaying!

Here is what I have tried so far:

1. Reset PMC
2. Reset PRAM
3. Ran the Apple Hardware Test (didn't find anything, even in thorough mode)
4. Recover my Time Machine backup from an external USB drive, through my Macbook pro using the iMac in target mode
5. Re-installed Snow Leopard, from the Macbook Pro (again, as I can't even boot off the SL DVD without getting the multi-language kernel panic!)
6. Wiped the iMac's HD, using secure erase, then re-installed SL (as in #4)

Of all of these, the best results I got was restoring my TM backup, then I could again connect through Screen Sharing. I can't start from the SL DVD, all I get is the kernel panic.

That's about it. Now I'm biting the bullet and looking at the Apple service manual to see how easy it is to get to those diagnostic LEDs on the main board.

I'm still struggling to accept that this is a hardware failure - it would seem very unlikely that this would happen both times when running the same software. Considering the first time around, all I needed to do (!) was to reinstall the OS, to me points to a software problem (I was thinking corrupted video drivers, but since I reinstalled everything fresh this time....). Unless it just happens that this game is so demanding video-wise that it killed the hardware because of it! I don't know.

Here are the system specs:
iMac 24'' circa 2008, Intel Core 2 Duo
3.06GHz CPU
4GB RAM
Video: NVIDIA GeForce 8800 GS 512 MB
Resolution: 1920 x 1200 (before changing and crash)
Running Snow Leopard 10.6.6 (10j567)

Next thing I will try, before taking the tools out, is to wipe the HD again and try installing my old Leopard OS on it, to see if this will make a difference. It's an act of desperation, really.

I'm running out of ideas and would greatly appreciate any other things I overlooked. I'm still a newbie when it comes to Macs - my 2008 iMac is my first.