How to encrypt data on an external hard drive?

Have you looked into TrueCrypt? From the website:

Main Features:

• Creates a virtual encrypted disk within a file and mounts it as a real disk.

• Encrypts an entire partition or storage device such as USB flash drive or hard drive.

• Encrypts a partition or drive where Windows is installed (pre-boot authentication).

• Encryption is automatic, real-time (on-the-fly) and transparent.

• Parallelization and pipelining allow data to be read and written as fast as if the drive was not encrypted.

• Provides plausible deniability, in case an adversary forces you to reveal the password:

• Hidden volume (steganography) and hidden operating system.

• Encryption algorithms: AES-256, Serpent, and Twofish. Mode of operation: XTS.

TrueCrypt should do the job.

http://www.howtogeek.com/howto/6169/use-truecrypt-to-secure-your-data/

TrueCrypt doesn't work if you're planing to use backup programs such as Windows Vista/7 backup, as it does not see the drive mounted. I tried both options with no success. The solution is to look for backup drives that come with encrypting option.