After doing the Apple Hardware Test which showed faulty RAM I put back my old 4GB (2x2GB) RAM sticks, retested and had no errors. I had all my data on an external drive so I did a complete restore back to Lion 10.7.5. After installing the system, the Spinning wheel of death appears very frequently, but I put that down the indexing which had a remaining time of 5 days. After rebooting the system once, I couldn't boot it again.
I have done the hardware test multiple times since then and everything checks out fine. I have installed Lion twice since then also, but if I do a restart it never boots further than the grey Apple logo and spinning wheel like the very first time. I have tried all start-up options. Safe-mode never boots. At the moment I am trying the "Choose Startup Disk" option and choose the partition but I only see the wheel of death.
After doing a verbose boot, the system did infact reboot after approximately 3 hours. However, even just entering my login password brings back the spinning wheel of death which runs for a couple of minutes so that the mac is effectively useless and then "kernel panic".
How can I diagnose what is going on here? Processor, Permissions? Other problems?