The 4 GB limit of FAT32 means that no single file can exceed that size. It has nothing to do with the size of the drive/partition itself.
To convert from NTFS to FAT32 without formatting the drive you could use a disk utility such as Partition Magic however this process is not totally safe and could result in data loss if you are unlucky.
There is no public way to run unsigned code yet on retail PS3 consoles so that leaves any "iSO" loaders out until a hole is found.
As mentioned in our Site News though, CJPC is currently able to run PS3 back-ups on his TEST PS3 console, but not as iSO files yet... only the extracted game files (similar to the way PSP back-ups used to be ran before there was a PSP "ISO" loader). I guess my point is this is why the "single file size limitation" isn't an issue.