assume it is on /mnt/hda1,

1. dd of=/mnt/hda1/new_home if=/dev/zero bs=1M count=50

this create a new 50M file

2. mke2fs -j /mnt/hda1/new_home

this create a new ext3(or you can choose other fs) on new_home

3. mount /mnt/hda1/new_home /mnt/test -o loop

mount it to a mount point at /mnt/test

4. cp -dRp /home/* /mnt/test/*

copy everything over

5. mv /mnt/hda1/knoppix.img old_home; mv /mnt/hda1/new_home knoppix.img

replace it. when everything is cofirmed work, you can delete the old one.