I think you mean 256MB!
I don't understand about OS 9.2.2 running in the background? That sounds like Classic Mode which is a close approximation of 9.2.2 and ran within OS X from 10.1 to 10.4. However G3 Macs included a dual boot option which meant you could run EITHER OS X OR 9.2.2 natively, with certain apps (iTunes, AppleWorks among them) running in either OS. For that, you would have to have installed 9.2.2 separately.
If both OS's are present, then to change from Jaguar to 9.2.2 (i.e. natively, not Classic Mode) you would launch System Preferences, click Startup Disk, and choose 9.2.2 - in 9.2.2 you would select the StartUp Disk option from the Control Panels (which is the equivalent of System Preferences in pre-OS X).
If you're in OS X and 9.2.2 is not listed in the Startup Disks then you don't have it natively, only in OS X Classic mode.
The advantage of running natively instead of in Classic Mode is that some apps only ran in native mode. However, it does sound as if you installed Jaguar and included the OS 9.2.2 option, which installed the Classic Mode, not native 9.2.2
A G3 iMac will support an external HD up to 128GB in size, but you'd have to find the right kind. Modern drives won't be recognised or won't work.