Can I use an external drive as my main drive?

Hi can you please tell me if it is possible to set up an external hard drive on a iMac and use it as the main drive to boot up from?

What it is, my iMac is a late 2007 model with a 260gb ssdrive, I wanted to upgrade it to a bigger drive, I have found out that I can purchase a crucial m500 drive which is 960gb, which will fit inside my iMac.

However I was wondering if I clone my old hard drive on to the new one, can I then use it, without actually installing it into the iMac? ( I can then install it or have it installed at a later date).

Regards Allan