Ubuntu can read NTFS file systems and drives formatted by other OSes, such
as Windows. To format in Ubuntu you use a partition editor such as Gparted.
I do not use Ubuntu, but Kubuntu, and can't tell you where to find the
partition editor precisely, but look under System, Administration.

If you want to access the external drive in Windows then use a Windows
format such as NTFS. If you want to use it just in Ubuntu then a Linux file
system is better because it does not need to be defragmented. You can format
NTFS or ext4 from the partition editor in Ubuntu.

Do you want to also use it with Windows? If so keep it NTFS formatted. You
could also partition it to be NTFS and whatever you pick for Ubuntu.

FAT32 can be read by ubuntu and winxp and win98 and win95,
thats why most external drives are preformatted to FAT32.

The recommended practice is to use FAT32. Your USB drives, as the general rule,
use FAT32. There can unintended problems in using NTFS even with Windows
products. There is a whole set of policies related to external drives
especially if these are NTFS.

I have to say that that is not my experience. All the
pen/thumb/flash/whatever you-prefer-to-call-them drives I've ever used
have been FAT formatted, that is true, but all nine of my USB hard
drives (a mix of Western Digital, Seagate and Iomega) were NTFS until I
started playing with them. Now, most of them are ext4, except for the
Seagate and one of the Iomegas, which I've left as NTFS as they contain
my videos and music, which I *might* want to use on a Windows box, someday.

The answer I would give to the OP is this: if you're happy formatting
hard drives under Linux and you're *absolutely* certain that this drive
will *never* need to be hooked up to a Windows box, then I would
recommend switching it to a native file system (ext3/4, Reiser,
whatever, your choice) as a native format will handle file and group
permissions correctly, unlike either FAT or NTFS. Otherwise, leave well
alone and just use the drive as supplied; whatever its format, Linux
will handle it.

If you do decide to switch, the easiest way to do it is, as already said
elsewhere, using gparted - make sure to set the volume label to
something sensible though, as otherwise the system will mount it under a
default name which probably won't be terribly helpful.