Go to prefrences, and select advanced. Under general tab it will let you select the location which can be external. Anything you import from a CD or buy via iTunes store will go to that folder.
If you have another folder on your main drive, just open them with iTunes and it will link to them.
what he said
Will selecting, "Keep iTunes Music folder organized" cause all the folders in my external hard drive to be rearranged?
yes, it will organize them all by Artist and if you have multiple songs and/or albums, then they'll be sorted by that within the Artist folder. Since i have all my dance related music sorted by Genre and rest by Artist, let iTunes do it will double the amount of folders, so I always choose no. If you want to browse by artist, then go ahead.
I would do everything in one folder or partition. More easier unless you have some already on the pc drive and don't want to move them. But once you set the preferences, it will all go to the new folder.
I still can't figure out why people hate iTunes, simpler than WMP and better looking than Winamp. What ya'll guys use?