Using an External HD for Time Machine and iTunes My MacBook Air only has a 128Gb HD so I have a 500Gb external HD which I have my iTunes folder on (as I have over 200Gb of music and videos). But I would like to also use the external `hard drive for Time Machine. Will that work? 

Will it use up all the remaining space, leaving me no room to add new media?

Should I (and can I) partition the external hard drive without losing my files?
Time machine will use "up to" all the partition. So at the beginning there is going to be free space remaining. This free space will lessen with the time. When the partition is full, TimeMachine will delete the oldest backups.

So yes I would suggest a partition and yes the Disk Utility will allow you to partition your hard drive with a low probability of data loss. (When formatting there is always a probability of dataloss but it's really low).