Fresh Lion Install

My computer came with snow leopard and I downloaded Lion from the app store over it.

I would like to format my computer and do a fresh install of Lion over it.How can I do this?Can I put the Lion on an external harddisk and boot it from there orr?

You can if you have the originally downloaded package from the App Store still. You'll probably need to download it again first. I'm planning to do something similar myself this evening.

And you can download it again free by holding the Option key, hitting Purchases and then the Lion icon. Burn to a thumb drive. You can put Lion on an external disk if you wish but personally use SuperDuper to backup and clone.

There is a hidden 4GB .dmg file inside the OS X 10.7 application which you can use to burn a OS X DVD to boot from.