It's possible
I'd just like to reply to say that this is possible, although not with any straight forward method.
I'll detail the steps I used to get this working:
First I partitioned my external drive with disk utility creating one large partition (I chose 40GB) and 1 tiny partition (all you need is a few MB). It's crucial to ensure that you click "Options" on the partition tab of Disk Utility and then chose "MBR" (Main Boot Record).
From there, I downloaded rEFIt (
http://refit.sourceforge.net/#download) and copied the efi folder located on the image to the small partition. After that you need to "bless" that partition by opening Terminal, changing directory to your efi folder on your external (cd /Volumes/%your partition name%/efi) and running the command: "sudo ./enable.sh". You also need to install rEFIt on you mac, do this by running the "rEFIt.mpkg" package located on the image.
Next you need to create (or download - try torrent sites eg. piratebay) a custom XP install cd. If you are going to make your own, use the "EmanuelTutorial" in this package of tutorials:
http://forums.ngine.de/download/file.php?id=5.
Once you have created your custom install cd or thumb drive, you need to remove the internal hard drive from your mac. I know this sounds nuts but it is 100% necessary in order to do this. Trust me, I tried 1000 different ways around it with no luck. Once you've removed your internal disk, boot from the custom windows install cd you created by holding "C" during a bootup with nothing but your external hard drive plugged in through USB. You should now be able to install Windows to your external hard drive. Be sure to use the large partition and not delete the small one used for rEFIt.
Once you have windows installed, you can boot into it at the rEFIt boot screen (it will show everytime you boot your mac) by selecting "Windows on Partition x" (x will probably be 1). Now you will need the bootcamp drivers to make everything run smoothly. Unfortunately, late versions of bootcamp do not contain drivers for XP. So you can either use a Snow Leopard Install DVD or you can simply download the bootcamp drivers (again, check torrent sites such as piratebay for this). I used version 2.1 of bootcamp.
Once you have the drivers, burn them on a cd or just put them on your external drive containing the XP install while booted into OS X. Then simply boot back into Windows via rEFIt and run the bootcamp install. If all goes well you should have a fully independent Windows XP installation bootable from an external drive.
One limitation of this is the fact that you will not be able to use a pagefile for virtual memory and will get an error message everytime you boot windows. In order to fix this, simply disable Virtual Memory in windows via Start->Control Panel->System->Advanced->Perfomance->Settings->Advanced->Virtual Memory->Change.
Also note that you must ensure there are no other USB drives plugged into your mac when trying to boot into Windows, you will get a BSOD.
That's it! If you need help with anything let me know and I'll see what I can do to help!
