I'd go for 64-128MB. Since the iMac currently has a 32MB and a 16MB module, I'd just replace the 16 with a 64, for a total of 96MB, which should be just fine until you get hundreds of requests a second
Pretty much all the distros come with MySQL and all the other GNU server tools. I like Yellow Dog, but I don't know what 2.0 is like, and for now, SuSe 7.1 seems to be the best distro.
Linux makes a marvelous server, but just be aware of one thing: out of the box, they're typically not very secure, and apt to get hacked into. I suggest, after installing using a full install (to make sure that no programs complain of missing libraries, etc), have a linux guru friend go through and do a security check, mainly making sure that only those TCP/UDP ports are open that you actually need.
tooki