Should definitely work, but your internal harddrive that's directly connected to the motherboard is most likely faster and more efficient. With the external, the data has to travel through either the USB/Firewire cable (which is slower I belive than serial ATA internal HD connection) and through the USB/Firewire interface of the computer, then to the main motherboard. Interal HD just seems more direct, what I'm trying to say. External HD seems like it takes more routes to get the information to the computer and I'm thinking that might create problems with latency which is bad for audio creation. I personally wouldn't run any application in realtime off my External, I just store and backup data files, no system files or other program files. Occasionally I'll run music files or movie files, but that's about it. If your going to run VSTs off your External that means you gotta install your software to your external, I don't know about that. :ermm:
Someone else here probably knows more than me. I'm just assuming, but I do think I'm making a valid point.