i'm pretty sure it's talking about formatting the drive, and not just the partition... so your suspicions/worries are correct.
i would recommend buying an external hard drive (i got a 1tb for $100) and save everything off the hard drive... if there's no OS installed on that first partition you can just copy over the entire root of the drive.
that aside, i think the ps3 has some kind of security in place (on the flash installation) to refuse to boot if there are any partitions other than GameOS and linux. i have nothing to back this up but knowing sony.... i wouldn't doubt it.
after doing a backup of the entire NTFS partition, format the whole thing with the ps3, then when done with the ps3 installation stuff, try shrinking the partition to your preferred size.
you can use PartedMagic to shrink JFS partitions. download here:
burn it to a disc, reboot your PC and press F2 at power-on (or F1 if old PC) and change the boot priorities to CD/DVD as #1, Internal HDD as #2. put the disc back in, save&exit and reboot.