no, the main downside to fat32 is the 4GB file size, in looking my iphoto library is 4.61 GB so it wouldn't fit on a fat32 formatted drive.
I'm still on an old version of iPhoto, but I'm pretty sure the iPhoto library is still actually a folder, much like OS X (and iOS) applications. It may look like a file, but that's just some trickery in the Finder--if you right-click it and do "Show Package Contents" (or look at the directory in Terminal), you'll see what I mean.
(That being said, it's presented as such to prevent the average user from poking around inside the "file." It's meant to be modified by iPhoto itsef only.)
time machine will not work on fat32 either (although you can put 2 partitions on the drive, extended for time machine, and whatever you want for the other part)
This is true, and the OP may wish to consider it if he/she wants to both easily share a read/write partition with PCs while using another partition for, e.g., Time Machine backups (which requires HFS+).
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Are there Mac specific programs which require HFS+, like iPhoto? Anything that won't transfer to FAT32?
Besides Time Machine (which requires directory hard-linking, a Leopard addition to HFS+), I'm not aware of any (though if you're using it for Mac backups at all, even manual ones, I'd say HFS+ is still a good idea since you're less likely to run into problems with the type or number/length of characters in file names or file sizes since different file systems have different restrictions here).
If file/folder permissions are an issue, HFS+ is really the only file system supported on OS X that contains this feature. FAT variants simply don't support this at all, and NTFS does, but Apple's implementation is read-only. This probably isn't a big deal for most people, however.
In short, if you're only using it on Mac, go with HFS+ (a.k.a. MacOS Extended). If you want to use it on Windows as well, consider a different format (see advantages and disadvantages another poster provided) or multiple partitions (as suggested by others, e.g., above).