Windows XP is not able to install onto a removable drive (USB or Firewire), for many reasons.
- Piracy would be easier. Microsoft does not want people moving Windows XP from computer to computer so easily; that is why there is activation that includes the hardware it was installed on
- Driver Support. Every device needs a driver, and not all devices use the same driver. When you install Windows XP, it installs the drivers it knows of, then you add any extras. If the drivers are not there, the hardware sometimes does not work
- USB Drive Support. USB drive support is not built in to the Windows XP Setup program as a destination
Now, if you have the SATA drivers loaded (i.e. Windows XP SP2 or 3), you may be able to put it onto an eSATA drive, but I have not tested this. You would run into the same issue as 1 and 2 above, if you move it to another computer and attempt to boot from it.
As well, pkobylin's answer above is true as well; part of the search for drives include looking to the BIOS to see what it supports booting from. If your drive is not in the list, it will fail installing, as it can't load the boot loader