Creating FAT32 Encrypted Disk Image

I have a 2TB WD external hard drive and am looking to have half of the space used in such a way that it is password-protected and also can be accessed by both Macs and PCs.
I have tried the following:
Disk Utility
New Blank Disk Image
Size: 1TB
Format: MS-DOS (FAT)
Encryption: 128-bit AES encryption
Partitions: Single partition - Apple Partition Map
Image Format: read/write disk image
Received this error message:
"Unable to create "testname.dmg." (File too large)
ALSO:
Disk Utility
New Blank Disk Image
Size: 1TB
Format: MS-DOS (FAT)
Encryption: 128-bit AES encryption
Partitions: Single partition - Apple Partition Map
Image Format: sparse disk image
Received this error message:
"Unable to create "testname.sparseimage." (Invalid argument)
Thank you. Any assistance would be greatly appreciated!
AppleCare was unable to provide a solution.

FAT file system has partition and file size limits, which apparently you exceeded. I think the file size limit for a FAT32 file system is (2^32) - 1 byte.
See here for more info.
http://lmgtfy.com/?q=FATFile+SizeLimit

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