Something else is going wrong here. Maybe a faulty video card? Seems strange though, since your external monitor displays an image when the computer boots on the internal drive.
Do you have another working Mac sitting around? I would advice trying to boot from an external drive, just to make sure your PowerBook is indeed working well… Sorry, I can't think of a better idea right now.
Target mode turns your Mac into an external hard drive, that can be mounted on another Mac's Finder just like any regular external FireWire drive or CD-Rom would. Press and hold the T key on startup. If your screen worked, you would see a purple background with the orange FireWire logo. That's it! Just plug a FireWire cable between the target Mac and another Mac, and the target Mac's disk will mount on the other Mac's Finder. Now you can transfer files between the Macs at FireWire's lightning speed… Very useful.
If you manage to mount your PowerBook's hard drive on another Mac this way, you'll be able to erase the drive and install a completely fresh copy of Mac OS X from there.