since quite some time i'm running ubuntu on an external hard disk, connected to the PC via USB. This works quite well. I recently got a 32GB USB stick and i installed (so no live USB) Ubuntu 11.10 on it. I found this more practical because smaller than a hard disk. BUT the OS it is running a lot slower than with the HD. I checked transfer rates and compared with the HD and it looks as if the USB is quicker than the HD. Any idea why? I partitioned the USB stick like this: first a swap area of about 2GB, then the ext4 root partion and last an NTFS partition.
USB Flash drives performance is inferior to traditional hard drives. It's just a different technology and not as fast. The illustrious Jeff Atwood has an article explaining this in detail on his Coding Horror site, where he goes into more detail. Lots more detail.