The short answer: Yes, definitely. Open Firmware (for PowerPC Macs) and EFI (for Intel Macs) support external booting.
Now for the longer answer: when we say yes, we mean, yes, you can boot off external devices but under certain conditions, especially for PPC Macs. There is a guaranteed way to successfully boot up both Intel and PPC Macs from an external device, and that is if your external device is connected to the Mac via FireWire.
However, if your external device does not support FireWire, things will get a little tricky.
For Intel Macs:
You won’t really have to lose much sleep over it: EFI in Intel Macs (usually) supports USB device booting. To do so, make sure your Mac is turned off, insert your USB device, power the Mac and hold down the ‘option’ key to bring up the Boot Manager. Next to your Startup disk you should see a picture of a CD or a USB device, depending on what device you have connected to the Mac. Select the desired boot device, and you’re good to go.
In the event the Boot Manager throws up nothing but a white screen, give it a little time for it to detect your hardware. If the white screen persists, restart the Mac by holding down the power button until it turns off, and try again: it usually works after 1 or 2 tries.
For PowerPC Macs
It’s essentially the same as doing it for an Intel Mac. The only difference is whether your PPC Mac supports booting off USB devices. Results for this are varied, at best: there are many who claimed that PPC Macs do not support USB booting, while some have disputed that certain PPC Macs have newer firmware that allows for it. In that case, your best bet will be to purchase a USB-to-Firewire adaptor and try it again. That usually works for most people.