You can't convert NTFS to Fat32 while XP itself can see Fat32 converted to NTFS type partitions. In order to run 98 there you will have to delete the existing 2000 primary partition first. If you have problems with fdisk the Linux people came out with GParted that will remove "any" partition and even various types for different OSs. Windows Fat16, Fat32, NTFS, the Linux type of VFat, Solaris, etc..
Is your hard drive over a certain size limit for fdisk? The updated version of fdisk can be downloaded and used to replace the original once the 98 boot floppy is made up. The links for the updated version of fdisk are seen at http://support.microsoft.com/?kbid=263044
What about drives that are larger then 100-120gb? Even the update has it's own limitations. One example of installing a 98 single primary partition on a WD drive is to download WD's own DRFat32. Seagate, Maxtor, and others may provide their own bios bypass type of drive utility for larger capacity.