All you have to do is junction the Steamapps folder to a folder on an external drive. On 64 bit windows that's
C:\Program Files (x86)\Steam\steamapps
See this super user answer for how to make a junction, there are also programs/shell extentions that make it easier, but for one junction, this is pretty easy.
Since you're on windows 7, this code should work:
mklink /J <new directory to be linked> <target directory>
Note that if you do this Steam will act rather weirdly if you run it without the external drive plugged in; it will attempt to download updates for games that aren't there and will force re-checks of your games on occasion since they went "missing". It's nothing major, but just try to avoid running Steam while the drive isn't plugged in.
I do this both on my Desktop (Steam installed on SSD, games are on an HDD) and a laptop where they're on an external drive. It works quite well.