I never tried flashdrives larger than 1 GB with my deneb, but I do use an 80 GB usb HD, and that works like a charm.
I just partitioned and formatted the drive. Didn't have to do anything extra.
The filesystem I used is
SFS.
If HDToolbox is giving you troubles, try
HDInstTool instead.
An external USB HD uses the same device driver as a flashdrive, so I don't know why it shouldn't work.
*edit because of typo.*