Will Time Machine delete files already on my external HD?

Yes, that's an OK solution for what you need to do. In fact, if you can partition off just enough space for all the files on your hard drive, then you can just clone to the newly made volume. Much faster than a Time Machine backup.

To resize the drive do the following:

1. Restart the computer and after the chime press and hold down the COMMAND and R keys until the menu screen appears. Alternatively, restart the computer and after the chime press and hold down the OPTION key until the boot manager screen appears. Select the Recovery HD and click on the downward pointing arrow button.

After the main menu appears select Disk Utility and click on the Continue button. Select the hard drive's main entry then click on the Partition tab in the DU main window.

2. You should see the graphical sizing window showing the existing partitions. A portion may appear as a blue rectangle representing the used space on a partition.

3. In the lower right corner of the sizing rectangle for each partition is a resizing gadget. Select it with the mouse and move the bottom of the rectangle upwards until you have reduced the existing partition enough to create the desired new volume's size. The space below the resized partition will appear gray. Click on the Apply button and wait until the process has completed. (Note: You can only make a partition smaller in order to create new free space.)

4. Click on the [+] button below the sizing window to add a new partition in the gray space you freed up. Give the new volume a name, if you wish, then click on the Apply button. Wait until the process has completed.

You should now have a new volume on the drive.

Clone Lion using Restore Option of Disk Utility

Boot to the Recovery HD:

Restart the computer and after the chime press and hold down the COMMAND and R keys until the menu screen appears. Alternatively, restart the computer and after the chime press and hold down the OPTION key until the boot manager screen appears. Select the Recovery HD and click on the downward pointing arrow button.

1. Select Disk Utility from the main menu then press the Continue button
2. Select the destination volume from the left side list.
3. Click on the Restore tab in the DU main window.
4. Check the box labeled Erase destination.
5. Select the destination volume from the left side list and drag it to the Destination entry field.
6. Select the source volume from the left side list and drag it to the Source entry field.
7. Double-check you got it right, then click on the Restore button.

Destination means the new external backup volume. Source means the internal startup drive.

They won't be affected, but using a storage disk for backup is not the best idea. You should keep backup and storage disks separate. However, if you must use your storage disk for Time Machine then I suggest you partition the drive and use the new volume for Time Machine. This volume should be at least twice tha capacity of the hard drive you are backing up.

Kappy is dead right in his assessment. It is highly UNRECOMMENDED to share a external HD as both a backup and data HD. HD's fail everyday so if you take the risk of sharing the HD for double duty when and if it fails you will have lost not only the data but it's backup too! In addition it is very wise to create redundant backup, if your work is valuable to you this is important because backups can and do fail, in this case redundancy is wise.

Never use the word "dead" around an old man. 😁

LOL!!! OK I won't.

Credit goes to Jonathan Winters! I forgot that.