Is this tested and proven ?

You have to differentiate two things, ie
1) The "hosting" file system - ie the file system which holds the knoppix files.
2) The knoppix compressed image ( loop mount ) file system.

For item 1, it can be VFAT, ISO9660, NTFS, EXT2, EXT3 and reiserfs.
For item 2, it can only be ext2.

For your case, what's relevant is item 1, and ext3 is a supported file system. It should be working.