I wanted to do this, but decided that as I already had a working HD I might as well use that.

Someone on amiga.org posted about compact flash cards a while ago and said that it worked but you can have some problems.

CF cards are definately good. I installed MacOS 7 on one and used it in my PowerBook 1400 and it worked really quickly. Only real problem was that it was a 32MB card so had only enough room for a basic install of OS7 and ClarisWorks.