Using an External HD for Time Machine and iTunes
Time machine will use "up to" all the partition. So at the beginning there is going to be free space remaining. This free space will lessen with the time. When the partition is full, TimeMachine will delete the oldest backups.

So yes I would suggest a partition and yes the Disk Utility will allow you to partition your hard drive with a low probability of data loss. (When formatting there is always a probability of dataloss but it's really low).