After getting the proprietary USB adaptor cable, I was able to test out the Direct Copy function.
The good news is that it works, the better news is that it works for both self-powered (using AC) HDD i.e. the 3.5" type and also USB powered HDD, i.e. the 2.5" variety. This is a big improvement over the Sanyo HD2000 where the similar function will only work with self-powered HDD and thus the much smaller USB powered HDD is ruled out. Another point to note is that the Sony camcorder must be on AC power, presumably this will avoid files lost in case it run out of power if on battery.
For my test, I used a Maxtor Basics, 640GB external HDD that is AC powered. This came preformatted in NTFS and the camcorder programme suggested to reformat the HDD to FAT32. It took about 40 seconds for the formatting.
It then asks if you want to Play or Play Without Copying.
If you access the Menu when an external HDD is connected, you'll find an item, Easy Copy under the Edit group. You will use to copy videos to the HDD. The camcorder will first calculate the necessary space for HD movie copy. In my case it took about 3 minutes since there were about 100GB of videos and then the copying starts. This took quite a while and luckily there was a progressive timeline on the camcorder that also shows the elapsed time. In my case it took about 2 hours and 15 minutes and this seems to be faster than a Windows copy that I did earlier which took about 3 hours. (Not sure of the actual timing since I just left it to run but definitely it took longer earlier.)
Three folders are created in the HDD; they are AVCHD, DCIM and PRIVATE. Photos are stored in a subfolder under DCIM and videos are stored in the subfolder STREAM under AVCHD as .mts files. This file structure is same as the one on the build-in HDD and thus you can play and manipulate them on the camcorder just like they are on the built-in HDD or SDHC card.
When the HDD is connected to a PC installed with PMB, the programme recognises it and offer to import the files over as if the camcorder is connected.
This Direct Copy function is not so useful for me since the XR350 already has a 160GB built-in HDD. For other models that uses only SDHC cards, it would be very useful when going on long holidays since you can copy your files to an external HDD without the need of a PC and freed the SDHC card for more videos. Thus you need not carry a lot of SDHC cards.