Walaikumsalam,
No not in USB, I have a HDD 20gb..
Xbox supports any USB storage device after the update.. it doesnt matter if its an external hard drive or a small USB.. it should fit the USB 2.0 Socket..
The maximum size of 1 game I've seen is 7-7.5GB (e.g: Assassin's Creed 2 oooooorrrrrrrr hmmmmmm just any high end single disc game is not more than 7gb).. so in an 8GB USB you will be able to install maximum 1 game..
I havent used a USB for storage before.. but XBOX configures it in System Settings > Memory.. and takes some space for its own system.. I think it formats it and takes 1GB.. but Im not sure.. But it will be supported..