featured post as div background

You’re code is not working as you have an echo within an echo, try this code (not tested)

<?php
echo '<div id = "circ" style="background: url('.$src[0].'><ul><li><a href = "'.the_permalink().'</a></li></ul></div>';
?>

If you’re echo’ing something and then you want to add php within that echo you need to break the echo by adding ‘. $variable .’