NTFS was designed to improve the many lacks in the FAT16 file system.
In general ext3 is the best option but that's only possible in Nix. In Windoze a good rule of thumb is if it's a hard drive of some sort format to NTFS. The only exceptions would be if your dual booting, then make a small partition FAT32 as the NTFS standard changes frequently making writes from other OS's sometimes risky.
Small portable devices you typically want to format FAT32 because of the lower overhead and because it's supported in almost every major OS out there. So sharing with Linux and Mac users are easier and you get more usable space on the device. FAT32 will also be much faster on smaller partitions.
NTFS has greater addressable space which means larger partitions, larger files and longer file names.
NTFS offers security options not available in FAT32. such as ownership and different levels of file permissions.
NTFS while still plagued by fragmentation is a big improvement on FAT32's very primitive file placement. NTFS is far less likely to lose pieces of files due to fragmentation as such it's a more robust disk format.
The only strengths of FAT32 is portability and that it takes far less space. So the only places you typically see it used is in specialty applications that still use DOS based software and on portable devices like thumb drives and MP3 players, though both will soon start bumping into FAT32's size limitations as such NTFS becomes a better option.
The latest version of NTFS has finally incorporated features that was found in ext2 and ext3 almost a decade ago. It still lags behind ext3 in many features and fault tolerance. I've included a link with some side by side comparisons.