Having installed and used and/or using Ubuntu on an ACER and ASUS
netbook I would say yes. However, I have always installed onto the
internal HD, after Windows was installed, thus a dual-boot.

I don't see why Ubuntu could not be installed onto an external HD. You
just have to make sure the drive is recognised by the computer and the
Ubuntu Live CD/USB. After that it seems to me that you need to pick
the correct HD to install it on.

To play is safe, first boot the Live CD/USB without the external HD
installed, start an install until the place where the partitioning
setting is being set and note the name of the HD present, probably
SDA. Then boot with the external HD hooked up. Now another HD should
show up, probably SDB. You might also be able to tell the internal and
external HD apart by the partitions and the sizes of the HDs and their
partitions.

Make sure you are installing on the correct HD. Don't install the
Master Boot info on the external HD or you will have to have the
external HD hooked up just to boot up.

Are you saying you have a 512 MB flash drive or 500 GB USB hard drive? Perhaps
Puppy could install to a 512 MB flash drive, but Ubuntu is too big for that. If
you meant it is 500 GB, then you can have lots of room for whatever you
decide...many distros are aware of each other and add themselves to the Grub
boot menu...more advanced users can point you in the right direction.

Yes. But there are potential problems with the grub bootloader. If you write
grub to the hard drive and change your setup you may not be able to load
Ubuntu. The bootloader is a snapshot of your system at a point in time using
relative drive designations. When you change devices before booting it could
change the relative designations.
My preferred method is to write grub to the external device and then use the
boot manager that is built into the netbook to select the boot device.

See Full Circle Magazine, Issue 47, page 35.