How do I format my 8 GB USB drive to FAT/FAT16 in Windows 7?

I already tried FORMAT /FS:FAT, diskpart, Disk Management and HP USB Disk Storage Format Tool.

Do I really need to buy a smaller capacity drive? Can't a formatting tool ignore the area beyond 2 GB?

My Asus netbook's BIOS update requires the USB to be formatted as FAT16, and I couldn't get the various Asus BIOS update utilities to work.

Disk Management and DISKPART don't let you delete partitions on removable media. But you can use DISKPART's clean command to nuke it and start over. Here is a series of commands that worked for me:

DISKPART> list disk

  Disk ###  Status      Size     Free     Dyn  Gpt
  --------  ----------  -------  -------  ---  ---
  Disk 0    Online        40 GB      0 B
  Disk 1    Online      7538 MB      0 B

DISKPART> select disk 1

Disk 1 is now the selected disk.

DISKPART> list part

  Partition ###  Type              Size     Offset
  -------------  ----------------  -------  -------
  Partition 1    Primary            500 MB  1024 KB

DISKPART> clean

DiskPart succeeded in cleaning the disk.

DISKPART> create part primary size=500

DiskPart succeeded in creating the specified partition.

DISKPART> active

DiskPart marked the current partition as active.

DISKPART> format fs=fat quick

  100 percent completed

DiskPart successfully formatted the volume.

DISKPART> assign

DiskPart successfully assigned the drive letter or mount point.

This creates a 500MB FAT partition as the only one on the disk. list part is only used to make sure I selected the right disk (and the Size shown was from a previous attempt; yours will say something else closer to the full size).

There isn't any way to format a FAT16 partition larger than 4 GB (2 GB under Windows). Use a partitioning tool to repartition the drive (you may need Linux for this).