DiskWarrior,
Drive Genius,
TechTool Pro or TechTool Deluxe that comes with AppleCare can all repair that problem. However, If you do not wish to invest $80 to $100 in one of these utilities then yes, backup everything you can and then boot from the install DVD to run Disk Utility and erase/reformat your hard drive.
Under the circumstances I would feel better if I ran a surface scan on the drive just to be certain the drive itself is not failing. A drive with new bad data blocks is 39 times more likely to fail in the next sixty days than a drive with no new bad data blocks and is the best predictor of impending drive failure. Significantly more accurate than the S.M.A.R.T. values reported by the drive itself. Drive Genius or TechTool can do that for you.
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