The only way I know of to fix this is to partition the drive into multiple 32GB partitions.

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br3nd064

Use floppy drive to boot your system or if u don't have one try with bootable usb flash drive.
Try with win98 startup disk and use fdisk.exe to create partition.
Faulty the fdisk utility will display wrong partition size (maybe negative) but thats ok. Reboot and again with the same startup disk run format.exe
After an hour or 2 you are done.
Don't worry about wrong partition or format numbers win98 reports.
Last boot normaly to windows and u will have your 250GB drive FAT32 ready.
Maybe u need to assign a drive letter from "computer management" "disk managment".
Hope this helps.

I think not.

OP: what does "way more universal" mean?

Thanks for the input, kaison. However I have not told the entire 'story' about this drive. In the past it was a drive in my PC and now I want to use it as USB drive. In the beginning it had one NTFS partition (for the OS) and one FAT32 partition. With Partition Magic I was able to repartition the whole drive to the status as I reported in my original post, without losing a single file on it.
Now the drive works fine and I could remove all files to empty it, but I want a very clean erase so I'd like to format it. I guess with FDISK you can only format if create a new partition too, so that's not what I want to do. FORMAT however looks good to me, but the problem is I can't find any application that runs in DOS, only Windows versions.

@ russki: FAT32 is 'way more universal' because I can run on Windows, Mac, Linux, Unix,... NTFS sucks because Windows is the only one that can read and write it properly.

I've already made images of +4GB DVD's in the past on a FAT32 drive and there was no problem with it. This because every GOOD image making utility offers the possibility to split the image in parts of 4GB and the virtual drive has no problems with mounting them it either.

there are also several ways to get NTFS to work with OSX. a couple filesystems in MacFuse as well as a program called NTFS for Mac OSX, so it's not really a problem nor is it "better".

Why not use ext2 instead? You can use it inside windows with the ext2 driver.

Thanks guys for all the replies, but I got the problem solved. Used FORMAT application on a bootable floppy created on a Windows 98 PC (XP made bootable floppies that could not run the DOS version of Format) and formatted the whole drive in FAT32

@ johnnyq1233: defragging has no large speed improvement unless you have a 15 year old drive. And even if you want to defrag, who cares about the speed, just do it at night and at regular times. Just admit, FAT32 is the best if you're formatting a USB HDD.
NTFS is just one of the stupid previleges of Windows, because let's face it, if a new format was required that could go beyond 2TB drives and handle files larger than 4GB, it would not have been very difficult to develop something that might have been called FAT64 that would run on all OS's just like FAT32.

@MrLinux: Do you have a Partition Magic that can format a +32GB in FAT32. I have PM 8.0 and in could not get it done (FAT32 was not in the options)

The file system, yes, but Windows utilities won't format it for more than 32Gb... Except the older Win98 versions, where I think they do 127Gb.

Did you format then on a Windows or a Linux platform? Because I guess Linux can still format large drives in FAT32.