Qemu is a virtualization / emulation environment. Grub is a boot loader designed to load the kernel into memory and run it. None of these programs are directly related to your question, although you can certainly use Qemu to run a virtual machine that uses Grub to run Linux to do what you want.
Modern Linux distributions create initrd, which the bootloader stores in memory for use by the kernel as the source root file system. Initrd performs actions such as loading the modules necessary to access the hard drives where the real root file system lives. In your case, you need to make sure that initrd will find your ISO, mount it and use it as the root.
initrd , . - livecd, initrd zcat /boot/initrd-2.6.whatever.img | cpio -id , . init, , .