Solution 1:

Windows will not let you partition removeable storage devices. You must delete all of the partitions and make a new, full size one outside of Windows. I recommend the GParted Live CD.

Solution 2:

Have you tried using diskpart?

Specifically, in a cmd.exe window, running the following commands will erase and reformat your USB drive:

> diskpart.exe
    list disk                 'This will list your disk drives, 
                              ' note the number of your USB drive
    select disk #             'Replace # here with the number from above
    clean                     'This removes all partitions
    create partition primary
    select partition 1
    active
    format fs=NTFS QUICK
    assign                    'This assigns it a drive letter
    exit