Can I install OS X from external hard drive to internal hard drive? My hard drive is failing so I put a brand new 500gb hard drive in my MacBook 2008 white 13".

I have a retail disc of Snow Leopard but the install keeps failing over and over again.  It hangs at 29 minutes remaining, 28 minutes remaining and fails at 14 minutes remaining with loads of errors in the install log.

My idea was to connect the old hard drive (which has Lion installed) using a USB docking station, boot from that and using the installer on the old hard drive desktop, install Lion straight onto my new internal hard drive.

Would this work and if not how can I get either Lion or Snow Leopard installed on my new internal hard drive?
Yes - Mac do not care if the boot drive is connected internally or externally.

I usually recommend installing the OS on the new drive with it connected externally since you don't do the swap until after you know the drive boots externally, but the opposite order is fine.

Now, if you have problems, it's going to be because of hardware issue (cable, or drive failure) or possibly the software isn't complete / correct.