To answer your question in a nutshell, yes. You can load Windows 7 to an external hard drive provided your BIOS allows the operation. However, there are some caveats.
As Carey mentions, USB2 has a raw, theoretical max throughput of 480Mbps. In real world usage, you may only get 60% to 70% of that; therefore, you would be looking at a useful throughput of 288Mbps to 336Mbps. Compare this to an IDE throughput of 1.06Gbps (133MBps) and to SATAs 1.5Gbps and SATA-II 3.0Gbps. You will take a tremendous I/O performance hit if you use a USB2 external drive.
However, all is not lost. If you have an eSATA connection, you can use an eSATA drive which will give you the native performance of the SATA interface with the benefits of an external drive. Even if you don’t have an onboard eSATA interface, you can easily add one to your PCI (limited to 1.5Gbps SATA) or PCI-e (not speed limited) expansion slots. However, using the latter solution and depending on the card manufacture, you may have to provide the controller drivers at installation time.