Yep, I keep Steam installed on its own drive, a 10,000RPM velociraptor (and for other games not from Steam). It will work fine.
Much the same here, and it seems to work well.
Though I took the rather tortuous route of initially installing it on the C drive and then moving it to the games drive later, which involved much faffing with the registry. It works fine, but I don't recommend it (I especially don't recommend it with an Oblivion installation if you're using OBMM, because if you get something wrong, the latter will quietly delete everything it manages.)
Edit: just read the posts about this Steam Mover thing, which sounds like a much better idea!