Look in iphoto help for the exact specifics, because I'm doing this from memory. I just wanted to let you know that -- yes, indeed -- it's possible. Until I put in a new hard drive (internal) a few months ago I did exactly as you are proposing to do. In fact, I didn't move the photos back over until a few days ago.
I don't know about doing it THROUGH iphoto though. I think what you have to do is just drag and drop the whole folder over onto the external. (Quit iphoto first.) That will copy them. Then rename the old folder something like "old iphoto library."
Then, when you launch iphoto again, it will tell you it can't find your library of photos. It will present a dialogue box that will let you navigate your way to the new folder. Launch it and you should be in business.
One caveat, after you get this up and running. You will definitely be wanting to back up those photos that are now on an external drive. You might need another external drive, or maybe you're just planning on using DVDs or something. I'd hate to see you forget about it and then possibly run into trouble down the way.
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