Linux Compatible with FAT32?

Hello,

I am running a computer that currently has Windows Me installed and would like to install a separate partition for Red Hat Linux 7.0. The thing I was wondering about is, if Windows Me is running on FAT32 partition, can I install Linux on a separate partition or do I need to convert back to FAT16? Or, if the latter is true, can I simply buy an external hard drive that isn’t FAT32 and put Linux on that? Thanks