Why won't my MacBook boot.

My Macbook has abruptly stopped working. I tried to log in and was stuck with a pinwheel, I restarted and was met with the flashing ‘‘question mark in a folder’’.

I google the problem and tried booting from a recovery partition (CMD + R), clearing the PRAM (ALT+CMD+P+R), resetting the SMC (Battery out, hold power 5 secs) with no change, it still starts up to the flashing question mark folder. I then plugged in an external hard drive that has an old Time Machine backup and tried to boot to the external drive (hold OPT on startup), the backup was recognized and I had keyboard and trackpad control. On selecting the backup it went to grey screen for several minutes and then back to the question mark folder, but no longer flashing.

At this point I'm prepared to replace the HDD, however I'm concerned there may be a different problem since it won't boot on the external hard drive.

Any advice would be appreciated.