Reboot your Mac. When you hear the boot chime, hold the COMMAND + R keys. You will enter the Lion Recovery environment. From there, simply choose to reinstall Lion. It will simply remove the current system and replace it with a fresh copy. None of your data will be deleted or moved. The only thing that will be replaced will be the core system files. There is no longer any need to make backups, migrate your data, or mess with partitioning.
If you'd like to read more about the Lion Recovery function, go here: http://support.apple.com/kb/HT4718
There are no disadvantages to a clean installation. But the return on Lion has been severely culled due to Apple's decision to prevent any kind of modification to the OS. With previous OS X builds, users were able to select (and deselect) packages (such as printer drivers, extended languages, etc.) during the installation process. Lion brings everything and the kitchen sink.
The ability to trim away parts of OS X was probably the most compelling reason to perform a clean install (saving GB of space).
Your notion of how hard drives work isn't accurate. There's no "prime" location for data, outer ring or inner ring. So long as the files are contiguous, your data will be delivered optimally. Access times depend on rotation latency (speed at which the disks spin, calculated in RPM) and seek times (the time it takes the head to reach the desired location to reach the file), although density plays a role too, by packing more bits of data per region (thus increasing throughput).
Moreover, OS X handles the defragementation of small files on a regular basis, ensuring continued performance over time. It's also of note that such things are gone by way of using SSDs.
Lastly, clean installations may also reduce bugs introduced by updates. While OS X is quite resilient, updates can introduce new bugs into the system. Often times, Apple technicians will request a clean installation and applying only the latest subsequent update in an attempt to isolate bugs (rather than upgrade from a previous version of the OS and then applying a slew of incremental updates). These problems are however quite rare.
Best Answer
A clean install is just that - it wipes out everything.
You can't do an "in place" clean install (as far as I'm aware). Even if developers wanted to provide it it would be a nightmare. I'm not just blowing it out of proportion (I'm a developer) - it would be a nightmare.
PRIOR TO ANY OF THIS MAKE A FULL SYSTEM BACKUP. Hard drives are cheap. If you can't afford a hard drive for backup, then DO NOT ATTEMPT THIS - NO SERIOUSLY. AND WHEN I SAY SERIOUSLY I MEAN SERIOUSLY SERIOUSLY.
That said, you CAN do a reasonable clean install and still maintain MOST of your information. Here's how:
Create a bootable DVD, flash drive or hard drive with the ML installer.
1a. Make sure it really is bootable!
I did this with Lion (but not ML) but AFAIK it should work.
Clean installs "break" applications (many install libraries to work correctly or create 'hidden' directories).
Good luck (and remember: FULL SYSTEM BACKUP FIRST)