I'm trying to install Mountain Lion. I believe I have a bootable USB drive with the installer but I can't get Parallels (v9.0.23136) to see it. If I open the help for the Configure:Hardware:Boot Order page it shows an option to use an External boot device but this is an option for my blank virtual machine. I'll look further but this thread is about as close as I've seen so far.
Update: I seem to be having some success. I ended up installing from the disk image inside the downloaded Install Mountain Lion app. I think I used the install from disk image option but selected Configure before continuing. Setting the CPU to 2, video ram to 512 Mbytes. Set boot order to DVD/CD. Maybe missing pieces, I tried a few items. Install on the virtual machine hard drive.