Out of curiosity, why do you want to keep Windows on FAT32? There's no really good reason why anything should be formatted with that filesystem anymore. I don't think you'll notice any significant speed differences on your swap file between FAT32 and NTFS - not to mention that fragmentation is not really a major issue because it's just one file.
My advice (and how I normally partition) would be to have a 20-30GB drive with the Operating System on it and then everything else on a second (or second and third) partition.
As to your question as to why Windows refuses to format the 4GB partition, I've seen Windows refuse to format stuff if the partition table gets corrupted or otherwise wonky. Given the confusion between disk formats on the first partition, I'd recommend blowing away the partition table and starting fresh anyways.
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Eat antimatter, Posleen-boy!
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