I had overheating issues a while back with my iMac 24" Extreme. The machine itself never faltered, but I was concerned that this was chronic issue that would eventually bite. And the iMac is not exactly easy to get into to replace a dead HDD.
I had AppleCare, and after some unsucessful 'fixes' Apple came back and said there was no problem... (but then, why were they trying to fix it?!). With some serious pestering, Apple finally agreed to replace the machine. [Now rocking a (2009) 27" i7.]
Stick to your guns and get it seen to. A dead HDD in an iMac would be a serious pain in the proverbial a**.