you need to make sure have downloaded the service pack installer (make sure when your downloading it your actually saving it on your external hard drive) im assuming that your windows xp is installed at your external hard drive, download the service pack 2 at microsoft website just to be sure your installation files are free from viruses/malwares i hope i was able to answer your question.
Unless the external hard drive is where the operating system is installed there is no need to apply SP2 to it and it will not install. SP2 is for the OS, not the physical drive.
Unfortunately, it is not advisable to run any type of Operating Systems to an External Storage Device. This is because external storage devices are specifically designed smaller and more handy for storing important files and not running the entire operating system.