Provided you have at least a few GB of free space, I'd suggest that an "archive and install" is probably the easier option, as it will restore all of the system files to original without losing any data. Just read over this first: http://docs.info.apple.com/article.html?artnum=107120
If you don't have enough space to do that, you'd be wisest to back up all of your files, and go ahead with the clean install.
Kernel panics often indicate defective hardware, sometimes defective RAM. Have you added RAM to your machine recently? If you can, try swapping / removing DIMMS to see if one is defective.
If you don't have any third party RAM in your machine, and the machine is under warranty, call Apple and let them diagnose the problem. (They might have you archive and install OS X to rule out a bad install. But has anyone actually had kernel panics caused by a bad install? Maybe. I don't know.)
If you do have non-Apple RAM, take it out and then call Apple. If you don't, they may want to blame the non-Apple RAM. Be careful when you remove the RAM, which is susceptible to damage from static electricity. If you don't feel comfortable messing with the RAM, you may want to just leave it alone.