Data recovery on Lion with a disk that disk utilities cannot mount? I ran iDefrag last night because my MBP was running sooooo slow. I barely ever use it and it has 300 GB of free space. I used to use OnyX to optimise the disks on Snow Leopard but I didn't see that option in Lion. I let iDefrag run and went to sleep. This morning I woke up to the Do Not Enter sign and the spinning thing below it. I made sure I left it plugged in so I don't understand what happened.

I booted into recovery and tried to run the disk utility but the repair failed. I tried to reinstall Lion but the drive can not be mounted. I'm currently downloading Lion onto a USB Drive, but now I'm thinking 16 GB won't be large enough to migrate my data like this guide shows: http://www.thomasverbeek.com/blog/?p=183

Am I even going about this correctly? I don't even know if the drive will be mountable once it's done downloading. I just don't want to lose the files on my desktop.
Reinstalling Lion won't necessarily save your data. It sounds very likely your hard drive was failing (disk access substantially slower than normal can be a symptom of failed reads and/or the drive attempting to recover), and it died during the defrag.

The USB drive is only used to install Lion (just like a DVD), not to transfer any of your existing data.

Your next step should be seeing if you can mount the drive on someone else's computer, either via Target Disk Mode, or taking the drive out and putting it in an external enclosure. However if the recovery mode can't mouth the drive, chances are another computer can't either.

It's hard to say for sure without more information, but at this point it's likely your best bet for recovering your data is having good backups. Failing that, there are data recovery services, but they can be extremely expensive.