Installing Mac OS on an external hard drive

I've had an 80GB Mac Mini for about a year and I absolutely love it. Yet, because I use it so much, during this short time I have quickly maxed out the storage with a large amount of photo and music files. Can I install my current Mac OS on an external hard drive where I will have 4 or 5 times the hard drive space for photos and music and still retain the option of booting to that or my Mini? I had a support tech tell me this was possible, but at the time I wasn't ready to do so.
Another option would be to store music and photos on the external hard drive such that iTunes and iPhoto will navigate to folders located on this drive instead of the internal Mini hard drive. I'm sure this would be the best option, but I don't know how to do either of the two.
Would greatly appreciate any assistance and advice. Thanks!

Since I've gone both routes, I figured I'd chime in. Shortly after buying my mini bought an external firewire (don't even think about USB no matter what the sales drone might tell you) and cloned my system to it. I then created a nicely sized BootCamp partition and used the external for Mac work and the internal for PC work. I kept a small Mac partition on the internal removing everything from the OS and Disk Utilities - basically a fast diagnostic disk. That was a great way to work and a side benefit is that the 7200 RPM external FW drive booted up a bit faster. Disk space taken up? Well, yeah, but how big is an external drive? Besides, there are external drives (and do it yourself cases) made especially for the mini so you can stack them.
This summer the internal drive started clicking - not a good sign - and so I cloned the PC partition and bought a new internal drive. I've had a fair amount of experience opening minis but I make up at least one new curse every time I do There are a couple mini fan wbesites around so check them out to find out what drives are mini friendly today, check out the instructions, and see if the job is for you. It isn't brain surgery but it is more involved than putting a bandaid on a skinned knee.

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