Mega Shocked (./2) :
Check out page 5 of the Hypernoid thread. NeoHomeBrew has some great info regarding shrinking among other things. Its a great read!

Thanks for this! Exactly what I am experiencing and this answers my question! The solution proposed is what I was considering as well.

It's annoying as it means the 2nd 16 tiles of each sprite are useless if you're shrinking sprites unless you use the special 'wrapping' width of 33. Can't imagine why there would be this limitation in the hardware except it is an oversight (bug). Oh well, nothing can be done about it.