Last I checked when formatting a drive, Win2k/XP automagically determined which FAT level was appropriate unless it was on the borderline of which one is right, in which case it gave you the option.
Like, drive is below 2g, it formats it FAT. Drive is above 2g, formats it FAT32. Drive = 2g, says "Hey, which format do you want?"
I know you WANT FAT32, but if your card is 512m and under, I believe FAT16 is going to be a bit more efficient than FAT32 anyways, if not just flat-up equal to each other. But you may have other reasons for requiring FAT over FAT32 (camera compatability, etc...) In which case you might try this:
Start -> Run -> "cmd"
"format X: /FS:FAT32 /Q" where X is the drive-letter of the drive.
That should force a FAT32 format.