i've never heard of a 360 using an External Hard Drive, but that doesn't mean it's not true.
depends on how many games/accounts you're going to use, i have a 120GB with 101GB free after a recent cleaning of the hard drive, i had 80GB free before i cleaned it up.
if you plan on using like a couple accounts, less than 10ishh games, you should be fine with 20GB. that's just my opinion though, i am by no means an expert.