You can store everything iTunes needs on an external HD. In fact that is exactly what I did. It is very simple to do on Mac. All you need to do is to make an alias for the external HD, rename it to iTunes, copy everything from your old iTunds folder (which is inside the Music folder) to the external HD, delete the old iTunes folder, and drag the alias into the Music folder.
From now on, iTunes will treat the external HD like the old iTunes folder and store and read everything there.