For issues related to the hard drive, I will suggest you to run the diagnostics. You may refer to the link http://dell.to/GAxNcY for steps on how to run the diagnostics.
Yes, you can install the operating system on the external hard drive.
Is there a specific reason why you want to install windows on the external drive?
The windows reinstallation DVD can be used to install windows on a new hard drive or a completely formatted drive.
Keep me posted with the information. I will be glad to assist you further.
Thanks & Regards Kuldeep M #iworkfordell To know more about Dell Product Support, Drivers & Downloads, Order & Dispatch status -> choose your region USA; India. For helpful Dell Support Videos, you may click Here.