There is no reason it would not work, but I would not do it. Those cheap USB keys typically have cheap RAM chips in them that are not built for long term heavy use like that. I would think a USB key used as a TM drive would not last long.
There's a detailed Apple Community discussion about this that backs up (sorry, I couldn't resist) exactly what Weaselboy is saying. One of the factors I hadn't considered until I read it was flash drives' vulnerability to static.
if you use it to back up once yeah it works, but if you looking to consistently back up over and over its gonna kill the less durable memory in these usb sticks, they are not meant for high cycle writing endurance.