I understand Puppy Linux can be installed on a USB drive. If you can boot from a USB mass storage device, than, yes, you could use it that way.
The output from dd or from ntfsclone can be futher compressed. How much is data dependent, of course.
Examples:
Using dd to back up partition "i" on wd0 to a server on your network, from OpenBSD:
# dd if=/dev/rwd0i bs=10m | gzip | ssh backup@server.gosha.net "cat > sd0i.dd.gz"
Using ntfsclone to back up /dev/hda1 to the same server, from Linux:
# ntfsclone -s -o - /dev/hda1 | gzip | ssh backup@server.gosha.net "cat > hda1.ntfs.gz"
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