It doesn't matter what sort of disk you are installing on as Parallels uses a single file to emulate a hard drive. Just attach the USB drive to the Mac as any other, format HFS+, put whatever there you want, and then simple put the VM with its disk image (.pvs and .hdd files) on that drive instead of in their default location (~/Library/Parallels/ location).
If you wanted to install directly on the drive, then no go, as Parallels doesn't support use of raw disks. Also, Windows XP will not install to a USB drive on a regular PC without some real hackery, so attempting to do it under Parallels using the emulated USB connection would most likely not work in addition to being completely pointless since you can just put the hdd file there.