Correct way to use an external hard drive

Hi, I just wanted to ask for a word of caution and wisdom before proceeding with using external HD for the first time.
My 320GB hard drive is finally filling up (mainly with music, photos, and videos), so just purchased a LaCie 2TB D2 Quadra to use as
a) time machine to backup whatever I have in my computer. (is it possible to use time machine to backup data on the external HD as well, or only the data in my computer HD?)
b) storing, backup, and live editing of photos and videos.
My main objective is to leave as much free HD space as possible in my computer HD and just use external HD for mostly everything. However, my concern would what to do when/if the external HD fails...
What would be the most ideal solution for my simple and novice situation? Suggestions or recommendations would be greatly appreciated.
Thanks.

I think I should start with the caveat "all drives can fail" and that any solid backup strategy involves more than one drive and/or a regime of burning critical data to DVD regularly.
In your scenario your best approach would be to partition the 2TB into several volumes; perhaps a couple for backup, one for scratch use and another for specific types of data - it wont hurt to have 5 or 6 in play.
Yes you can set any volume as a time machine backup volume of any other drive (space permitting of course)
I still come back to the original warning that anything can fail and for mission critical data it would be wise to have another drive as 2nd or 3rd Tier backup.

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http://support.apple.com/kb/HT4889?viewlocale=en_US
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