This question is related to Using the Mercurial hgsubversion extension with SVN Externals. However, the second part of the question relating to doing a hg svn update has not been answered.
Is it possible to get the SVN externals in the subversion repository that you pull from to be converted into a Mercurial sub repository?
We don't currently have any support in hgsubversion for automatically turning externals references into hg repositories. I'd be somewhat open to that as a feature contribution, but it'd need to be well tested.
I see that the original question also contains a partial answer to the externals problem you were having. However, could you just treat your configured externals as a regular Subversion repository folder and instead use hgsubversion to update Mercurial Subrepositories?
This obviously doesn't allow automatic handling of externals, but seems like a halfway decent solution to the problem (at least until the externals issue when not using the standard Subversion repository configuration is fixed in hgsubversion). It also looks like since Mercurial 1.5, the Subrepository feature can support other repository types for the subrepository like Subversion. See section 2.1.1 of the Subrepositories documentation.
Instead of trying to manage your dependencies via Mercurial (or with any SCM for that matter), try using a dependency management tool instead, such as Apache Ivy.
More details in answer to Hg sub-repository dependencies
EDIT: Similar answer with a slightly different spin at Best Practices for Project Feature Sub-Modules with Mercurial and Eclipse?
