Formatting FAT32 partition on 500GB HDD

I've just bought a 500GB usb hdd and I saw it has one primary FAT32 partition using all the space... sounds good...
Then I tried some configuration and finally needed to reformat hdd with a single FAT32 primary partition but... surprise, now Windows XP permits this nor some live linux distro: they make me create this kind of partition using maximum 384GB.
Why? Am I stupid? Am I doing a silly mistake or what?
Thanks.

See Microsoft Support Article about FAT32 Limitations with Windows XP. It says that the maximum disk size is approximately 8TB.

The maximum number of clusters is 268 million. The maximum cluster size is 32KB. So you've got to work out how to format using a larger cluster size.

Update: try the FORMAT command with the following flags:

/FS:FAT32
/A:8192

The /FS sets the filesystem type and the /A sets the default allocation unit size.