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when creating the new datastore would it be best to choose a 4MB or 8MB block size?
For 1.6TB you need an 8 MB block size.
Also, in the beginning of the wizard it asks which one of my two hosts to attach this new datastore to...does this really matter?
I assume this is the wizard on your storage systems!? If you want to be able to run the VM on different hosts (vMotion, ...) then you need to present the LUN to all of these hosts.
... would it be best to create one or two virtual disks for this VM?
This would mainly depend on the workload and your storage system. However, for use as a file server I think one virtual disk would be sufficient.
André