Does Time Machine need a "clean drive", or can I use an old hard disk I want to use Time Machine on my Mountain Lion. I have 1TB external HDD I use for storing various stuff. 

The thing is I selected the drive for Time Machine to work on but nowhere it is mentioned that it will either format the disk or Time Machine will create a separate folder leaving other stuff on the disk untouched. I am bit skeptical that it might erase my disk. I dont want that to happen.

What will happen if I let Time Machine take backups on that disk? Will it erase everything? Can I use that for time machine without erasing the stuff on it?
Time Machine creates a separate folder ('Backups.backupdb') at the root of the external drive in which it stores its backups, leaving all your original data intact.

Time Machine does require your external drive to be formatted as HFS+, by the way. If that is the case, you should have no problems.