The installer does not allow it, so here is how to trick it.

Note: for OS X Mountain Lion, see How to install Xcode 3 on Mountain Lion.

1. If Xcode 3 is on a DMG, mount it.

2. Open Terminal and cd to whereever the installation package is.

    $ cd "/Volumes/Xcode and iOS SDK"
    $ ls -1
    About Xcode and iOS SDK.pdf
    Packages
    Xcode and iOS SDK.mpkg
   

3. Open the installation package like this:

    $ COMMAND_LINE_INSTALL=1 open "Xcode and iOS SDK.mpkg"
   

4. Even though the installer ends with “Install failed” message, everything is installed and works properly.

It works because the installation package does this check for whatever reason:

    // Xcode and iOS SDK.mpkg/Contents/iPhoneSDKSL.dist
    function isDevToolsCompatible()
    {
        if ( system.env.COMMAND_LINE_INSTALL == 1 ) { return true; }
        if( system.compareVersions(my.target.systemVersion.ProductVersion, '10.6.6') >= 0 
            && system.compareVersions(my.target.systemVersion.ProductVersion, '10.7') < 0 ) {
                
                return true;
             }
        return false;
    }