I would base the formating of the SD filesystem on the type of computer you plan to use it with.
If you have a windows computer, use FAT32. If you run a Linux machine, go with ext2.
Also If you plan on installing GPE for the GP2X I would go with ext2. That way you can forego the slow down associated with having to format your card as FAT32, then GPE having to convert its FAT32 image file to ext2 so the GPE kernel can use the files in it.