The FAT support has raised a lot of repeated questions, so here's a FAQ about that:
Q: Can it play .iso files directly?
A: No. Only .wbfs files can be used. To convert from .iso to .wbfs use the wbfs_file utility.
Q: Isn't FAT limited to 4GB file size but a game iso is larger than 4GB?
A: Yes, that's why the files are splitted to 2GB or 4GB chunks.
The files are named gameid.wbfs, gameid.wbf1, gameid.wbf2,...
Similar to how the a .rar archive can be split to multiple files (.rar, .r01, .r02,...)
Q: If FAT size is limited to 4GB, why is the .wbfs file splitted to 2GB chunks instead of 4GB?
A: Because of the limitations in the FAT Library that is used (libfat).
EDIT: the limitation has been solved in cfg v48 so now the files are split to 4GB chunks.
Q: What about the file size, games on WBFS partition are scrubbed / compressed, will it take more space on a FAT partition?
A: No, it will take the same space because the files are not in .iso format but instead .wbfs format, which uses the same scrubbing / compression method as on a WBFS partition, actually the file format is the same as the format of the WBFS partition. And to be even more accurate, the .wbfs files will take even less space, because the wbfs block size will be smaller too. (The size depends also on the selection which partitions are copied - all or only game)
Q: I have copied the .wbfs files to my usb drive but the loader doesn't see them?
A: The files have to be copied to the \wbfs folder on the FAT partition, like this: D:\wbfs\GAMEID.wbfs
Q: Can I extract all the games from a WBFS partition to .wbfs files?
A: Yes, use this command:
wbfs_file.exe W: extract_wbfs_all D:\wbfs
Where W: is your WBFS partition and D:\wbfs is the FAT partition on USB (or on local hard-disk)
Q: How to convert all the .iso files to .wbfs files in one step?
A: Open up CMD where your iso files are and run:
for %i in (*.iso) do wbfs_file.exe "%i"
If you write that in a .bat batch file then you have to use %%i instead of %, like this:
for %%i in (*.iso) do wbfs_file.exe "%%i"
Q: How long does it take to convert one game to .wbfs?
A: Depends on hard drive speed and (scrubbed) game size. It should take the same time as copying a file. That means a couple of seconds for a game like WiiPlay which uses only about 100MB and a couple of minutes for games that take up 4GB...
Q: Are there any GUI wbfs managers that support .wbfs files on a FAT partition?
by pccfatman: Wii Game Manager - A GUI for wbfs_file.exe
by fig2k4: Wii Backup Manager
Q: Does running games from a FAT formatted SD / SDHC card work?
A: No, not yet. Yes, added in version 49. Note however that SDHC compatibility is still bad when running with ios 222. Regular SD cards however should work fine.
Q: What is the recommended cluster size when formatting FAT?
A: It's not important - any size should work fine. But 32kb is a good choice as that size is aligned to wii disc sector size.
Q: Is it possible to install a game from a dvd disc to a FAT partition in .wbfs format?
A: Yes. Just press button + to install the game as usual.
Q: Is there any advantage using FAT rather than a WBFS partition?