I think you just need to change the famework to 3.5 in your control panel. Log into the control panel. Click on IIS Tools. Under the IIS Settings tab click on the drop down menu next to Framework Version and change it to 3.5
get rid of the highlighted line in the web.config. This line is for .net 2.0 and you'll get a conflict if you switch to .net 4.
Looks like the user account you're using for your app pool doesn't have rights to the web site directory, so it can't read config from there. Check the app pool and see what user it is configured to run as. Check the directory and see if that user has appropriate rights to it. While you're at it, check the event log and see if IIS logged any more detailed diagnostic information there.
