The first answer was kinda short....
You can certianly increase your disk utilization efficency by using a smaller block size BUT there is a performance trade off while using FAT32 and the smaller block size. By creating the smaller block size the disk heads must make more frequent movements, reducing performance and throughput. Also smaller block sizes will increase the need for defragmenting.
Does the block size really improve disk utilization? Yes, by as much as 25% when going from 32k to 16k blocks (it is not double the efficiency)
But the downside will be a performance hit of about 15%
So back to my first resopnse, disk is cheap. I would concentrate on performance and stick with 32k.
Now would I go to 64k to get an even better performance boost? Maybe not. That depends on the memory located on the disk controller. If you have say 8mb disk buffer then yes! Without the supporting memory structure increasing block size may just add additional overhead and actually degrade performance.
Thats FAT32. Now if you start talking NTFS (Win2k, XP) then you will automatically use small blocks (4k).
Hope the longer answer helps