Time Machine wiped my external drive despite pressing "Don't Use"

I have an external hard drive(formatted as FAT32) that has been in use on/off for years. I even had backups on it (not using time machine). I mounted this hard drive, it was taking a while to mount. A prompt came up to ask if I wanted to use this drive as a time machine backup. I said "Don't Use". It hanged. Meanwhile, I opened disk utility twice. both I had to force quit. I then relaunched finder.

Assuming it would cancel the time machine prompt. Only when did the finder eventually relaunch that the drive mounted to see that all my files where gone and looking in thermal under ls -a to see their we're spotlight and time machine files along with some oddly named thing. About 1GB Is in use on the drive(I had much more that a gig on it). It is a TB drive

Here is the output from the ls -a in the Volume

.                   ._.com.apple.timemachine.donotpresent
..                  .com.apple.timemachine.donotpresent
.Spotlight-V100             .fseventsd
.Trashes                USBCˆö?␀.␀€␀
._.Trashes

Anyway would a tool like this (http://www.cgsecurity.org/wiki/TestDisk) help get back my files and format back to what I had previously? Or am I going in the wrong direction? Can help get my files back?

I should also mention that I ran verify disk from disk utility on the drive much later on to have this repeating until I manually stop the process

2013-02-16 12:06:23 +0000: / has entries after end of directory
2013-02-16 12:06:23 +0000: Truncate? no
2013-02-16 12:06:23 +0000: Extend? no

Thanks. If you have any questions please comment below

Solution 1:

Here is the answer I got on the Apple Support Forums:

Time Machine does NOT format drives, that I know of. If you connect a drive that is not formatted Mac extended TM should pop up a warning that it can't use that drive for its backup but it should Not indicriminately Format the drive.

I agree with Thomas that the drive is failing or has failed. More then likely if you copy data to that drive it will become corrupted. Time to get a new drive and throw that one in the trash.