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How old is the Laptop?
Unlike flash drives and mice, external hard drives require POWER, which they suck from the USB port. Older USB ports won't supply enough power to spin up the drive.
Judging from the fact that the laptop has Vista, my bet is that you will be fine. Plug in the drive and put stuff on it. When was the last time you backed up your documents on the computer? 
As for iTunes; yup. I run my library off of an external drive as well. actual "itunes music library.xlml" and "itunes library.itl" files need to sit in the My documents\music\itunes folder, but the actual music can be set to sit anywhere; including network or external drives. There is an option in iTunes to change the music location.
There is ONE catch. iTunes doesn't want the music folder to move around. If your external drive is "E" all the time; great. But if you plug in different external drives or USB keys, the external drive might end up getting reassigned a different drive letter, like "F". That would confuse iTunes (and most other programs as well). You occassionally will need to change the assigned drive letter using the "disk management" tool. On XP, the disk management tool is under "computer management" console, under the administrative tools in the start menu.
