Premiere Pro is not very conducive to the use of external drives for editing purposes in many respects.
What KIND of external?
If eSata or Firewire 800 you should be OK... USB is too slow for video editing
I have not used this... for reference only... eSata Dock http://www.amazon.com/Thermaltake-BlacX-eSATA-Docking-Station/dp/B001A4HAFS/ref=cm_cmu_pg_ t
I use FW-800's all of the time, to edit to/from, and keep everything in a Project on the external: the PRPROJ file, Copies of all Assets, the Scratch Disks, etc., as I migrate between computers.
For some background on using externals, please see this ARTICLE.
PP (CS5) won't allow me to.
What exactly are you doing, and what exactly is PP doing in response?