well if you fell that the system you have has some problems that causes the problems, try putting up a LINUX live CD and see if you can access the External hard disk files from there

The Xp cd from which you are installing may have a corrupt USB driver. try using a different disk or better try it on a Linux live Cd.
If detected Format it and safely remove it

I have had the problem with 250 gb hard disks when installing Xp .

Try installing Vista and it should work fine