On the external hard drive, can you scan it for viruses? It seems that you may have a boot sector virus. It is either that or you have a device driver issue. But seeing as you are trying to install windows to the hard drive, you may need to check the hard drive for a virus.

Advanced troubleshooting for "Stop 0x0000007B" errors in Windows XP

This is for you to read on the issue of the error.