Don't know your system specs, but it is possible that you are running out of RAM- Windows then uses the harddisk as "extended RAM" ("swapping"). This results in a strong impact on system performance. A RAM upgrade could speed up your system.
In my experience Windows XP should have a minimum of 1 GB of RAM, but 2GB increase system performance a lot. If you are below 1GB, even a naked XP with only the necessary processes running will result in hard disk swapping.
I think that Vista and Win7 need even more - 2GB minimum, 4GB is better.
You could check if you see a lot of harddisk activity (a flashing indicator on the case) when CPU is at 100%. This would hint on swapping.
In reply to your question, I agree with Pisces that an external installation will not increase performance. Chances are that everything gets slower, as the system has to handle 2 harddisks and USB-connections are slower.
Btw
Process Explorer is a great freeware tool for in-depth checking of processes.
Good luck!