I'm a little skeptical about calling this the world's smallest external hard drive, but whatevs. This isn't Guiness. This is more a USB-key than anything else, but it has a 4-GB hard drive inside and is about 2.6 inches long, so I guess it qualifies.
Japan-only at this point and it should sell for $220 and has built-in security.
Elecom MF-DU204G World's smallest external Hard Drive [Newlaunches]