Yes iPhoto works jsut fine with th eiPhoto library on an external drive - it must be formatted mac OS extended (journaled) -
Moving the iPhoto library is safe and simple - quit iPhoto and drag the iPhoto library intact as a single entity to the external drive - depress the option key and launch iPhoto using the "select library" option to point to the new location on the external drive - fully test it and then trash the old library on the internal drive (test one more time prior to emptying the trash)
And be sure that the External drive is formatted Mac OS extended (journaled) (iPhoto does not work with drives with other formats) and that it is always available prior to launching iPhoto
And backup soon and often - having your iPhoto library on an external drive is not a backup and if you are using Time Machine you need to check and be sure that TM is backing up your external drive
And you probably are going to want a small library on your MB wiht the whold library on the EHD - if youdo you should get iPhoto Library Manager - http://www.fatcatsoftware.com/iplm/ - to help you move photos between the two libraries
iTunes also is perfectly happy with its library on an external drive - check in the iTunes forum for specific instructions for that
As possible candidate for an external HD give this one a look: OWC Mercury On-The-Go Pro USB 3.0 & 2.0 / FireWire 800, and 2.5" SATA Portable External Hard Drive & SSD.
It's about the size of a mouse and USB or FW port powered. If you have a USB 3 port on your MBP the USB only model would be more cost effective. My wife uses one with her iMac cloned to it so she can boot up to it on Macs at school where she teaches and do her work.