"I haven't installed Vista, but I believe the "block size" it is talking about is the NTFS cluster size. XP used 4096-byte cluster sizes by default on drives >2GB.
Cluster size is essentially the size of each "fragment" that makes up a file. Whenever you write a file to disk, the OS breaks it up into multiple clusters and writes these individually. Any remaining part of the file which is smaller than a whole cluster takes the whole cluster anyway. The clusters which belong to a file are tracked in the master file table (MFT).
Small cluster sizes reduce "slack" (wasted space at the end of non-full clusters), but tend to have worse file performance since each small cluster needs to be fetched from disk individually. Furthermore, small cluster sizes increase the severity of fragmentation since each file has the potential to be broken into more fragments. Large cluster sizes tend to waste more space but perform better and be less impacted by fragmentation. Clusters larger than 4096 bytes may cause some disk utilities (such as Windows' built-in defragmenter) problems however.
Cluster size ideally would depend on the typical file size stored on the partition. If a partition primarily holds files smaller than 1KB then a 4096-byte cluster would be needlessly wasting space. Likewise, if a partition primarily contains large videos then a 4096-byte cluster would be needlessly harming IO.
As c627627 said, going for the default option will usually be best. It shouldn't make clusters so large that disk utilities have problems, nor clusters overly-small for the size of the partition being formatted (since larger partitions tend to hold larger files).
Source Which Block Size When Formatting? - Overclockers Forums