Get a utility to create a W98 boot floppy from
here and put it in your WIN ME machine and boot to that. Use the version of FDISK and FORMAT on the floppy to partition and
format the drive.
Due to the fact, that FAT32 is not intended for very big hard drives,
but NTFS is, the format utility in XP has the built-in rule,
not to format big disc partitions in FAT32 but only in NTFS.
(I think everything more than 32GB goes NTFS or so)
NTFS is usually better suited, so this might make sense in general.
There is no such limitation in Win98 fdisk and format utility (since it does not talk NTFS).
So such a boot disk will help you around.
The other option is to use Partition Magic to convert to FAT32.