MacOS – Mountain Lion Installation Error

OK, having had a good play the following options are possible with Parallels:

1. From the Recovery Partition on your machine, however this only works from the current one, not any other attached ones, so if you are booted into ML, you can only use the ML recovery partition - so no go for Lion
2. From original Media, in this case an official USB stick as it was not available on DVD, I didn't have one, so no good for me (note that hand made ones will not work, neither will if you created a bootable partition
3. From a Disk Image file. As with option 2. above, creating a bootable DVD/USB Stick/partition on an drive etc will not work if you have extracted the image file to create one. You need the actual DMG file. If you have the original App Store download, the easiest way to get this is is to rick click and Show Package Contents, then find the InstallESD.dmg file and make a copy of it.

Using the file from method 3. will allow you to use the new VM Wizard to create the Lion VM

As you have a definitive no - here is a workaround that most people are pursuing in this case. Run Lion in a virtualized environment on top of Mountain Lion. The commercial products like VMware Fusion, Parallels and VirtualBox all might assist you until those applications can be updated or replaced.

Of course, you could dual boot most hardware but a virtual solution might work longer term if you choose to upgrade hardware.