MS-DOS Fat16 to Fat32 USB

Yes. Read the TechRepublic blog entry I gave you. You can't use that method if Disk Utility thinks the drive is too small for FAT32, but it explains the basic concepts and why MBR is required for Windows compatibility.

Although Kurt Lang is probably right regarding Disk Utility, I'd try it anyway. Apple doesn't document the cut-off size for FAT16 (max size 2GB), so your thumb drive may be formatted as FAT32. Remember to set the partition map to Master Boot Record (MBR).

However, if you're willing to get down and dirty in Terminal, with diskutil or newfs_msdos you can format your drive as you choose.

Warning: These tools can be dangerous -- with a slip of the finger, a <disk2> instead of <disk3>, you could wipe out permanently hundreds of GB of your precious data. Have an up-to-date backup and be very careful. You have been warned.

First,

$ diskutil list

will give you a table of available drives; this is where you get your thumb drive's disk identifier.

Then,

$ diskutil partitionDisk /dev/<disk_identifier> 1 MBRFormat "MS-DOS FAT32" my_thumb 100%

will create one MBR partition with a FAT32 volume using 100% of available space, labelled "my_thumb".

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I don't think so. Last I read, OS X decides whether to user FAT16 or FAT32, depending on the size of the drive. If you specifically want it to be FAT32, format it on a Windows computer.