Setting up iPhoto library on external HDD
You can simply copy the iPhoto Library to an external hard drive and access it form there. Of course you need to have the external HDD connected whenever you want to run iPhoto.

To copy the library: Quit iPhoto. In your Pictures folder there should be a file (actually a special folder called a package) called iPhoto Library. Copy this folder to the new location on the external HDD. Since you're using iPhoto '09 you can just double-click on the library in its new location and iPhoto will open it and use it as the default library from now on.

This Apple Support document also covers the copy process. 

However, you need to be very careful if you have images that are not contained in the iPhoto Library (referenced images) as these won't be copied to the new location. If you have the "Copy Photos to Library" option checked in iPhoto preferences, and have always had it checked (it's the default), then you shouldn't have a problem.