USB memory support coming to Xbox 360 on April 6

Microsoft has announced that they will releasing a system update through Xbox LIVE on April 6, 2010 which will enable USB flash drive support for your Xbox 360. The USB flash drive can be used to store profiles, game saves, demos and more.

After updating your system on April 6th simply head over to the memory section to configure your new storage device, once that is out of the way, the system will conduct a one time performance and integrity check to confirm whether the drive is working properly. You can also configure the amount of storage you wish to use i.e up to 16GB.

USB Hard drives may work, but you’ll be limited to use 16GB of space.
A couple of points:

+ You can have a maximum of 2 devices connected to the console at a time, enabling up to 32GB of simultaneous storage.

+ The system won’t just configure the device once it is connected to the console. You’ll need to head to the memory area in system settings, select your USB Device, and choose from Configure Now (Format and Configure the Full Device), or Customize (you can choose how much memory you want configured for Xbox360 from the free space on the device.)

Source