FAT 16 was introduced with DOS Version 2. Technically, it supports up to 4 GB of hard drive space.
Due to a bug in (MS) FDISK, the limitation for Windows 3.x/9.x Operating System, the limit is stated to be a 2 GB limit This explains why there is a 4GB limit for FAT 16 in Windows NT and a 2GB limit when using DOS based Windows. FAT 16 has other limitations as well. For example, no more than 512 entries (that is, 512 files and folders) can be in the root directory of a hard drive.
Also with FAT 16, each cluster, or section of the FAT, gets larger large as drive size increases in each partition. This is important, as files are stored in groups of clusters much like you might store speech notes on 3x5 index cards. Whether theres one word or 5 lines on an index card, it still takes an entire card (unless you break with convention and tear off the part of the card youre not using!). The same is true with clusters. You can store an entire (small) program in the amount of disk space it takes to store the word hello, because one entire cluster is used for each file. At the maximum size of 2 GB, each cluster becomes 64K. Since the cluster is the smallest area DOS can address (without additional software assistance) saving a 1 or 2 KB (Kilobyte) file wastes 62 to 63 KB of space. Storing a one-word file that contains the word hello wastes even more. For this and other reasons, FAT 32 is preferable.
The good news about FAT 16 is that disk partitions in the FAT 16 format can be accessed by virtually every PC Operating System written.
The less than stellar news about FAT16 beyond the limitations mentioned is it is not reliable. Some would call it down right fragile. For all these reasons, unless you have a specific need, avoid FAT 16 where possible. If you need FAT and can use FAT 32, it is a superior choice.
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