No, you don't need NTFS.
Using 98SE to FDISK and FORMAT FAT32 will not have any issues w/ XP. You could also just FDISK w/ the 98SE disk and then format as NTFS when you install XP.
Again, if it were me, I'd only partition 4-6GB's for XP and then split the rest up how you see fit. Maybe chunk it up into a DATA drive and/or BACKUP.
If it's an XP bootleg, well, that's your own issue to deal with. Be warned that you could render your system useless if it's a certain copy of XP . . .