banirban,
Even if there is no problem installing an OS on an external drive (meaning a USB driver would have to be loaded PRIOR to boot from HD), there is the problem that the USB is a very slow bottleneck. Most internal harddrives can "talk" to the processor at around 300 Mbps or more. USB, on the other hand, maxes out at 11Mbps. Thus, even if you could load Linux on your external drive it would bore you to tears while loading and/or doing anything. That would be very disappointing.
Also, NTFS write support was experimental last I checked. I was very surprised to see that SuSE 9.0 supports it.