[How to] boot from Linux ISO FILE using Grub 2

Edit /etc/grub.d/40_custom and add the below entry

menuentry "Karmic Live CD (sdaX)" {
loopback loop (hd0,X)/my-ISO/ubuntu-9.10-desktop-i386.
iso
linux (loop)/casper/vmlinuz boot=casper iso-scan/filename=/my-ISO/ubuntu-9.10-desktop-i386.iso
initrd (loop)/casper/initrd.lz
}

The above entry assumes that ubuntu-9.10-desktop-i386.iso is put in sdaX/my-ISO/

After making the entry run
sudo