i keep my 25gb itunes library on my 500gb external.
i did:
under itunes > preferences > advanced
make sure "keep itunes music folder organized" and "copy files to itunes music folder when adding to library" are ticked. if they weren't before hand it may take a few minutes while it carries it out.
then go to advanced > consolidate library
this may take a while, and if you have illegally downloaded music you may get errors about filename's been too long. itunes doesn't specify which files so it's up to you to open up the itunes file directory in a text app and spot the long names.
after this simply drag your newly sorted out itunes music folder onto your destination ext drive. make sure you don't rename the itunes folder. then delete all the songs off your itunes. when it's empty, drag your itunes music folder from your external and add it back to your library. then go back to itunes preferences and change the music location directory to your new destination (basically instead of looking in your music folder for the itunes folder, tell it to go to your ext).
hey presto.
just some things:
make sure your ext is plugged in and on before opening itunes and playing songs.
i still have a few problems to iron out with mine, but that's because i switched from windows to os, and have had to format drives etc.
hope this helps.