I popped in a 4 gig card once when I first saw a Reader (preproduction model, but very close to final release). Definitely FAT32, and the Sony Reader could read it. But I can't tell you if I could read all of it or just the first 1-2gig.
I might be reading your post wrong, but are you sure it isn't the card reader or formatting of the card that is the problem? (And, of course, the 4gig cards seem to vary in compatibility with other devices like Treo's, for example.)
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