Create the non-domain users as contacts in your AD and add them to your distribution list.

That'll enable sharepoint to hit internal as well as external users with alerts.

You can't easily manage the creation and deletion of these contacts through outlook although group membership can be managed through this - one way to restrict this could be creating a separate OU for the contacts and setting up access permissions on this, assuming you'd like someone else to be able to create them without full domain administrative access.

SOLUTION

I have been troubleshooting this issue with Microsoft, and we have found the root cause of the error in Outlook. The error is caused by trying to synchronize folders that have two dashes ("--") in the folder name or folder path (other special characters may cause the same error.) The problem is unrelated to the size of the library or the number of items.

The fix is to rename folders that contain two or more dashes in a row. Files with two dashes are not an issue.