From the sound of it, the Recovery Manager you're using is an HP utility.
Was the computer recognizing the external HDD at boot?
Do you have the drive on a USB 3.0 port or a USB 2.0 port? Try booting with the drive connected to a USB 2.0 port if you currently have it on a 3.0 port.
A drive image is not a drive, it is an archive, usually compressed, that contains a copy of the files. You need to use the imaging program to make a boot disk to boot the machine, then point to the drive image and then apply that to the new drive.
Using the OS disk, would 'Windows repair' work possibly?
I'd try that before a whole OS install.