I have a external 5.25" diskdrive which I can connect on the diskdrive port on the back of my A1200.
When I boot my A1200 this drives pops up as a DF1: 
?
On the back of the drive there are a couple of switches which allows me to select the drive number and switch between 40 or 80 tracks.
When I try to format a 5.25" floppy I get an error: #21
Is it possible to read PC DOS floppies with this drive?
Sounds like you have a third-party 5.25" drive, not a Commodore A1020. In a way that's good, because with the switch set to 80 tracks it should work just like a normal 3.5" drive; it should be recognised by the system and you can format (DSDD) 5.25" disks to 880KB just like a 3.5" disk.
For initial testing, see whether you can reliably format double-density 5.25" disks and e.g. DiskCopy a 3.5" Amiga disk to them.
For reading PC floppy disks (160KB/180KB/320KB/360KB, double-density 40 tracks) you can use CrossDOS. You might need to set the appropriate Flags value in your mount file to tell CrossDOS to double-step the heads. That's because in 80-track mode it has to step heads twice to move to the next track of a 40-track disk.
I don't recommend using your drive with the switch set to 40-track mode. Also, the drive won't work with high density disks, so make sure you're not using those.
