http://www.rmi.org/sitepages/pid456.php
External-Combustion Engine
External-combustion engines include steam engines and Stirling-cycle engines. Stirling engines may be a promising technology for HypercarSM vehicles. They burn their fuel in a single chamber or furnace, with the heat from this combustion driving the pistons up and down in their cylinders to rotate the crankshaft. This arrangement allows for increased efficiency over internal-combustion engines because the combustion takes place continuously, instead of in a series of explosions (which inevitably leave more unburned fuel). Efficiencies of up to 60 percent are theoretically possible, compared to 45 percent for diesel engines and not much more than 30 percent for standard Otto engines.
Although Stirling engines haven't yet been used in any production vehicles, most early problems of bulk and reliability appear to have been ironed out, and current prototypes offer the prospect of lower mass, fewer parts, less noise, and much lower emissions than diesel counterparts
http://www.howstuffworks.com/engine1.htm
There is such a thing as an external combustion engine. A steam engine in old-fashioned trains and steam boats is the best example of an external combustion engine. The fuel (coal, wood, oil, whatever) in a steam engine burns outside the engine to create steam, and the steam creates motion inside the engine. It turns out internal combustion is a lot more efficient (takes less fuel per mile) than external combustion, plus an internal combustion engine is a lot smaller than an equivalent external combustion engine. This explains why we don't see any cars from Ford and GM using steam engines.
It seems to have to do with where the combustion takes place relative to the engine. All engines must be open to the outside at least part of the time, or else they would explode.
Although Stirling engines haven't yet been used in any production vehicles, most early problems of bulk and reliability appear to have been ironed out,I've built several sterlings. Power to size is always quite low. They do have a real potential for low power generators though. I under stand that linear sterlings have been designed for use in satelites, but I don't know it they are in use. Water pumps using the sterling engine have been available for shallow well use for a number of years. I can see a great number of applications that could be on the market immediately, but not vehicles. And, of course, there's always the cute little fan that runs off of your monitor heat.