I have used OpenSUSE, Ubuntu, puppy linux, fedora/redhat and even the dreaded Gentoo. I have also done light systems administration on several of those distro's (mostly SUSE) and even have a custom kernel compiled on one of my machines.
If you really want to use a USB drive as your boot disk, puppy linux will be the fastest and the smallest (other than **** Small Linux, which i haven't used extensively) , but it should fit on a 256mb drive (atleast it did at one time).
As far as a recommendation beyond that, Ubuntu is a pretty standard suggestion but, I prefer SUSE mostly because me and apt have issues.
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