Will my macbook overheat? (external display)

or damage it in anyway if I close the lid/top of my macbook while I use an external display... Since the macbook's fans blow out heat out of the keyboard, will it not be able to cool properly?

Actually the older iBook use to get rid of a lot of heat through the keyboard area, Powerbooks, Macbooks and Macbook Pros are designed to be able to used closed.

It will probably still get a bit warmer than normal though, so you might want to use a fan utility to cool it down a bit.
But unless you have a specific reason for closing it you might just want to leave it open and use it as an extended display (with your external monitor being your primary display).

I use my MacBook in closed-lid mode with an external monitor all the time.

There's no issue with doing this. You will not damage your MacBook.

I use my MB closed and on it's side(ie vent upwards) with the DVD drive pointing forwards when connected to my HD TV. It's then a fancy media center when you load up iTheatre.
It's been fine doing this for ages.