How are you running the application? Are you just hitting the website or are you building and running from within Visual Studio? If you are building and running you may want to tell it to use the local IIS web server. This would make sure it is using the App Pool you have set up to run with v4.0/integrated.
I am guessing that it is using the Visual Studio Development Server when running. This server is probably trying to run with the 2.0 framework. This then causes your error to be thrown.
Edit: To note, I normally just build my website application and then I attach to process w3wp when I want to debug. I do not use the publishing tool. Of course this means my local working directory is within the web root.