There’s more than one interpretation, but I tend to go with the following.
The last 25% is closer to the “real” time line of events.
Little Betty Elms arrives from Canada, all bright-eyed with dreams of becoming a big star.
That’s not quite the way the industry works, it’s all about who you know. She had to change her name to “Diane Selwyn” ('cause “Betty Elms” just would not do in Hollywood, Norma Jean). She had to deal with “casting couch” kind of auditions, and despite her great talent, she only got smaller parts in other people’s movies – namely Camilla Rhodes (a.k.a. “Rita”).
Camilla Rhodes became a star because she had “connections” (the kind of connections that force directors to cast you as their new discovery.)
Like she said at the party, Betty/Diane met Camilla on the set of one of her movies and they became lovers.
Camilla later left her to marry the director (smart career move).
Jealous and miserable, Betty/Diane hired a hitman to kill Camilla. The blue key meant that the job was done.
Tormented by guilt and her tremendous sense of failure, Betty/Diane kills herself.
The first 75% is the red herring. I’ve heard debates that it is the product of either Betty or Rita’s imagination around the time of death.
I’d suspect that in her tormented mind, Betty was trying to imagine an alternative reality in a “what if we could start over somehow?” kind of way. Bits and pieces of real events became the basis of her deluded, pre-suicide fantasy (or her dying fantasy).
The fantasy: Camilla survived the hitman’s attempt (the start of the movie in the limo that was based on Betty’s own real experience in a limo on Mulholland Dr.), with a complete loss of memory so they could meet again for the first time and start fresh.
Unfortunately, bits of reality intrude all too often – especially that damn key! They key that means Camilla is dead (a pandora box that is reality!). Betty’s experience of Hollywood was painfully bittersweet – it’s a place of smoke and mirrors.
This opinion is based on an amalgomation of interpretations and may not be the correct one