Your appraoch will not work. As far as I know you must install an image on the external HD (note that this basically will wipe all data of it). A tool that comes to mind is unetbootin
Else you can give Ubuntu 9.04 Netbook Remix a shot (it's already an image). If you have a 1GB (or bigger) memory stick, you can 'copy' the image onto it or you can also try to get it onto the external HD. Read the instructions here
Hope this helps.