FAT32 won't limit your available space. FAT16 only let you use 2.1gb of any drive larger than that.
But as Jough said, best is to switch to either win2k or XP, and use NTFS, which, while not readable in 98, is a far better file system than FATxx. It not only offers better compression, but better insurance against heavy fragmentation, and faster and more efficient defragging (certainly with the right tool - Diskeeper say, not windows defrag, which is useless).
The other possible route you could go down, more future proof, is to get an SATA card and an SATA HD, which are faster than IDE drives. Any motherboard you buy soon will certainly feature SATA natively, and many already do.
I wasn't sure how much better they'd be, but I benchmarked my new one and it runs at more than twice the speed of my best IDE (both drives are Maxtor).
(edit: FAT32 does have a limit on size - 2TB)