If you're just recording demos one or two tracks at a time, there's theoretically nothing wrong with using your internal disk. The problem is your old Nuendo software. I highly recommend Logic Studio 8, best value for the money, and since it's made by Apple, it will take advantage of your hardware the most efficiently.
That being said, it is a widely accepted best-practice to use an external drive to record to, and you can do this on the cheap if you buy an older 7200 RPM IDE drive and mount it inside an external FireWire 400 enclosure. No reason to spend big bucks on an overpriced external hard drive, as hard drive technology hasn't substantially changed in many years. You will be advised to make frequent backups no matter how reliable the hard drive company markets itself to be.