As Steve stated you can't install via an external USB optical drive. Your iBook should have an internal drive which may work if you set up the disk correctly and use the correct media.
You may want to give Apple support a call and see if you can still buy the required recovery disk for your iBook system. If they can't supply it (Apple technically doesn't support this model any more) see if they can at least give you the part number so you can try to find one online. Or you will need to buy a retail version of Leopard just make sure you get the copy with CD not DVD as your optical drive will not support the newer dual layer disks. From everyMac: Configured with a slot-loading 8X/24X/16X/24X DVD-ROM/CD-RW "Combo" drive.
The problem you will face here in creating a book disk is the iBook has a PowerPC processor and you will need a PowerPC based system to setup the CD/DVD disk. A newer Intel based system can't setup the disk correctly for your PowerPC system and it will not copy the correct library files as they are different between the different CPU chip architecture (PowerPC & Intel).
If you have a second PowerPC system and have a FireWire cable (400 version) to connect to the other system, you could boot your iBook in Target Mode and then use your other Mac (running Leopard) to install the OS onto your iBook. Just be careful on which drive you select as you don't want to over write your data on your good running Mac.
Follow this Apple TN How to use and troubleshoot FireWire target disk mode.
Lastly, remember this system won't run the newer applications and the system is limited to Leopard (OS-X 10.5.8) and apps that can run under it.
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