Use of anything other than a flash drive on the USB might be hit and miss, because the Kenwood USB port only puts out 500mA, and most HDDs need more juice to spin up. I have several laptop drives and enclosures, and my DNX7200 does not work with any of them. Elsewhere on the net, people report success with LaCie mobile drives. Any 1.8" drive should work, as they require less power. Keep in mind whatever you use must be formatted as FAT16 or FAT32, not NTFS.
However, a big problem with using flash or HDDs over USB is that they have to be indexed every time you start up. If you have more than a few GBs of music, it can take quite a while. Others might have different opinions, but I would recommend just going the iPod route.