That's a good idea. You will definitely loose storage space capacity doing it this way (initially). I believe Fdisk on Win98 / WinMe will not format the drive up to the theoretical max of 2 Terabytes. It will significantly lower than your drive's full capacity. I've heard that it may max out at 32Gig. I am not sure. But this would be a good starting point. Once you get it working on the PS3, you can always reclaim the lost space using partition magic, or something else out there.... I am not sure about the capabilities of MaxBlaster, since I've never used it.
I have a Western Digital 80 gig drive that I bought couple of years back. Initially, I had it on NTFS, but used partition magic to reformat the drive th Fat32. Voilla! Everything worked.
Good luck! I hope you get it working soon.