The card in the imac is actually excellent for general use and some basic gaming. It'll run half-life 2 at full quality and the highest resolution very smoothly, and it'll even play crisis at medium to high quality at 1024x600 very nicely.
But if you want to play the very latest high end games with the graphics turned up to maximum, then no it won't cut it. You'll need a high-end PC with lots of cooling and a big power supply - there's no way you could put the video cards needed into an imac without it getting much bigger, hotter, and louder.
There's really not a lot apple could put in the imac just yet, there's the nvidia 8600 which could be a little faster, but not so much that it would be a big improvement. If you want something better, you'll have to wait until ATI or NVidia make it, and apple put it into an updated imac. And when that happens, new games will be out and new high-end cards, and it still won't run the latest and greatest at the best quality ;D