I just bought an external USB 2.0 HD enclosure for a spare 40 GB HD I had. After installing it, I tried copying a few hundred MB folders to it and everything seemed fine. Eventually, I tried to erased a bunch of files out of it and I got too the forever spinning wheel. Even restarting the finder wouldn't give me back the control. I had to restart and if I would disconnect and reconnect the drive, it wouldn't mount on the desktop.
Then, I opened the case to check the drive closely. The Master/Slave/CableSelect jumper was set on Master. I changed it to Cable Select. After reassembly, it has been working fine since then, even DOS Fat32 formatted partition, as well as Mac HFS+ ones. By the way, I'm using 10.3.8 too.
Is your drive an external enclosure + internal IDE HD or a ready-to-use external drive (like LaCie and other) ? If it's an enclosure type like mine, maybe you could look at the drive inside to check its jumper and try another position (slave won't cut it, but try switching the jumper from master to cable select or the other way around).