I take it then that you don't have XP running natively either on your Mac.
Leopard has made changes so that sometimes a FW or USB2 drive won't mount or show up, which often means that new OS X requires a firmware update for the bridge it uses - Oxford or some other - and the vendor needs updated firmware.
That leads to a 'catch-22' situation.
If you boot from a DVD (Tiger or Leopard) same problem? FAT (or MSDOS) has always worked here, any size, even mixed.
If you do get it to mount, I would go to Partition tab in DU, then Options... and change it to Master Boot Record.
I know you want FAT, but just to see if it helps, you could try the NTFS driver MacFUSE 3G to see if it helps any (it can format to NTFS if the drive is using MBR).
Try plugging in the USB drive after the system is booted if you haven't yet. IntechUSA Speedtools has a PC Format utility, but I don't think it really adds anything and costs as much as a new drive would, which is always one option.
http://www.macsales.com/firewire - never had any trouble with these.