Is this heat excessive and likely to damage my iMac?
YES.
Damage is possible, or at the very least a reduction in long-term lifespan due to constant hot conditions.
Mountain Lion must be a complete re-indexing of the system, or doing something very processor-intensive. With luck it'll cool down over time, but if you have SMCFanControl and can up the fan to 5000RPM or whatever the max is, until it's done processing, anything to keep the temperature down is going to help.
Computers can operate in warm conditions and get hot, but while they can tolerate up to a certain condition, they are not designed to run at that temperature, constantly, for a period of time.
The 2009 iMac I had sold had its buyer contacting me 2 years later due to the (common) screen burn problem due to overheating within.
The CPU can run at up to 105C (before it shuts down the system, complete with fan that - in turn - won't channel out because it's stopped spinning and damage could still result), but it's the same commodity Intel CPU that didn't shut down a Dell and fried as a result. So, no, I don't trust Intel's thermal override function either.
These chips are not magical, and because they're Intel, anyone on any Intel forum - especially if they overclock for Windows - will quickly tell you about the importance of cooling.
Worse, aluminum acts better as an insulator than plastic. Macs use aluminum and because the chassis does not touch the CPU directly, it acts more as an insulator than a conduit for heat removal. Many people have opened up their Macs and applied proper amounts of higher quality thermal grease, or added holes in their cases (MBP or iMac) to improve airflow. (All that voids your warranty and don't blame me if you try doing any of that...)
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Getting warm/hot does not = overheating.
True -- getting hot isn't overheating but, false, that doesn't mean anything adverse isn't happening as a result.
Nice sig line, BTW... most people these days, regardless of political party affiliation, are more interested in their own businesses' survival than anyone or anything else...