You hard drive may have went south for good. Follow these steps to see if the hard drive went:
1. Get you original OS X install disk and boot with that disk (boot with the DVD by holding down the 'option' key and selecting the DVD for the boot up disk.
2. Once the first install screen comes up don't go through the install process. Select Disk Utility and run the Repair processes in Disk Utility to see if can repair the startup drive.
3. If Disk Utility can not repair the disk consider getting a third party disk program DiskWarrior. This is a great program.
4) If nothing an fix the drive, replace it because it is easy. This video shows just how easy it is.
Also if the Macbook is under AppleCare call them and explain everything that has happen. They will replace that drive if it is under warranty.
Mac Pro Dual 2.8 Quad (2nd gen), 14G Ram, Two DVD-RW Drives, OS X 10.8.3
2006 Mac Book Pro 2.16 (first Gen) OS X 10.7.4
2TB Time Capsule, 2 TB
32G iPhone 4S Black, iPad (3rd Gen) 32G Black