Well thought-out question!
I'd go with Method 2, but that's more of a personal preference. To me, the Method 2 Cons aren't much of an issue. I don't see the host OS outgrowing its 5-10GB partition, unless you start installing extra stuff on it, which you really shouldn't. For the sake of simplicity and security, the host OS really should be a bare minimal install, not running anything except the bare minimum needed for administration (e.g. sshd).
The Method 1 Cons aren't really an issue either, IMO. I don't think there would be any extra security risk, since if a rooted VM is somehow able to break out of its partition and infect/damage other partitions, having the host OS on a separate VG might not make any difference. The other two Cons are not something I can speak to from direct experience, but I my gut says that CentOS, LVM, and libvirt are flexible and robust enough not to worry about them.
EDIT - Response to Update 1
These days, the performance hit of virtualization is very low, especially using processors with built in support for it, so I don't think moving a service from a guest VM into the host OS would ever be worth doing. You might get a 10% speed boost by running on the "bare metal", but you would lose the benefits of having a small, tight, secure host OS, and potentially impact the stability of the whole server. Not worth it, IMO.
In light of this, I would still favour Method 2.
Response to Update 2
It seems that the particular way that libvirt assumes storage is layed out is yet another point in favour Method 2. My recommendation is: go with Method 2.
Here's what I did. I made LVM snapshots and then used dd to copy them to the external drive and that worked.
As explained in a comment, I considered rsync but it doesn't meet my needs. First, it won't back up a complete running server. And, restoring from that kind of backup doesn't really satisfy my requirements either. So the snapshots were the solution.
BTW, now I'm using btrfs, so snapshots are even easier.
Best Answer
In theory this should be fine but how are you going to ensure the VM data doesn't end up on the USB disk?