Thanks for this thread.
I have my Music files on an external drive as well. This weekend I was busy reorganizing the files because I have noticed that my music database has been splitted into three parts. There were many nested folders. Some music files were in "Music/iTunes Music/Music". Some were in "Music/Music" and the other part was in /Music. It got very confusing. I manually dragged all the files from /iTunes Music/Music into my main /Music/Music folder and started consolidating my library.
Little did I know that I still needed that old iTunes folder for the communication with the plugged in iPhone?! So I stupidly erased the iTunes Music folder... What's the end of the story? Well at first I thought I was totally f*cked and didn't know how to fix the problem. Then I remembered I have another external drive with the backup of my current external drive – PHEW!
BUT. It didn't work right away. I was almost crying because I couldn't get it fixed. My last hope was a restart. And there it was. It works again!! What a relief.
Update 1: I disconnected the iPhone and reconnected, just to make sure it goes smoothly. Unfortunately it's the same problem all over again and I have no idea what might have triggered it. I'm really frustrated.
Update 2: I've decided to start out with a fresh new library. Said good-bye to my playlists, play counts, favorites etc. I've decided to locate my Music Library on my internal drive nested in user/Music. The Media location is still on my external drive. I manually dragged all my music into the new library. Well, this feels kind of fresh! So far everything works fine with my iPhone. Hoping this is the end of this story.