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the external drivce is fat32 formatted

The largest an individual file can be under FAT32 is 4GB.

To support bigger files, you'll need to reformat it (HFS+ is the standard OS X format.)

MK: Try updating OS X to 10.4.11 and Transmission to the latest nightly version.

Which version of OS X are you using ?
You could try updating to the latest nightly version of Transmission and see if the error persists.

What version of OS X and Transmission are you using?

So far this seems to be only affecting users with OS X 10.4. Anybody affected with Leopard ?

They're working fine for me on OS X 10.5.2 and version 1.11+ (r5601) of Transmission. Try updating to the latest nightly version and see if it still happens. Link is below.

You mentioned disk activity: next time this happens, look at the "disk activity" tab of the Activity Monitor (or have it open while you start Transmission.) See what the disk usage (MB/sec) is like.

Occasionally Transmission will stop responding to the 'Hide' command

Yes, I've seen this a few times too. Started happening somewhere around version 1.06. Not a major problem, and it may actually be a bug in OS X, since I recall it happening to Safari.

Haven't lost any more data, Transmission was probably flushing out some data which was corrupted by the bug in the earlier version.

Good work on fixing it

Posted: Tue Mar 25, 2008 1:33 am Post subject: Re: Holy failed data, Batman! 1.06+ (5179); OSX 10.5.2. Jethryn, could there be some weird peculiarity with that torrent? Is the swarm poisoned? Possible, especially if its public. I considered this, but the torrents' working fine in r5129. Did you hav...

Using Transmission r5342. After 5 minutes of downloading, I had another 30MB of failed download (even though I only downloaded around 4MB.) I tried the official 1.06 release, ran it overnight, no issues there. Here's the trac ticket: http://trac.transmissionbt.com/ticket/781 It's marked as closed, t...

Here is the same torrent a day later, with r5334: http://img152.imageshack.us/img152/260/after2ca4.png "Have" has increased by 70MB, verified data has increased by 270MB, and I have 144MB more failed download. Although I "Have" more data now, my progress (percentage) has gone dow...

Read through here regarding the lost data from "Verify local data":
http://forum.transmissionbt.com/viewtopic.php?t=2748