I've been using different sizes Kingston datatravelers for booting Knoppix for a few years now also on older and newer Dells, never any problem with either syslinux booting (default flash disk install) or grub (setup an ext2 partition on the drive).

I suspect the troubles may have to do with MBR/partition table issues. I would therefore, as a first shot at it, use fdisk, delete the partition table, recreate it with 1-2 partitions (big FAT32 + small ext2 for evt grub install later), make FAT32 partition active, and run Knoppix flash install again, with formatting. As a second try, repeat fdisking, but use mkfs.vfat from command line instead of flash install to create the file system.

As a second shot,I would have tried installing grub to MBR and second, small ext2 booting partition. I have posted about this method here on the forums.