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USB Flash drives can be used.
Microsoft has confirmed that Halo 4's multiplayer needs either an 8GB flash drive or an Xbox 360 hard drive with sufficient space.
Microsoft also "highly recommends" using an in-built hard drive for the "optimal experience".
But if you own a Core, Arcade or 4GB Xbox model, you won't have sufficient space, meaning you'll either have to buy a bigger hard drive or use an external flash drive. Microsoft recommends using one of the official pre-configured Xbox 360 USB flash drives by SanDisk. Other flash drives can be used, of course, but must be configured accordingly.
Halo 4 isn't due out until November 6th, but Microsoft is presumably getting this information out nice and early to avoid last-minute confusion and complaints.
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