TL;DR: It's all about the Interface.
DOS prior to version 3.31 used a 16 bit sector number to communicate with the disk driver, thus the maximum sector number was 65536. With 512 byte sectors that adds up to 32 MiB - rather large for 1980.
DOS 3.31 introduced an extension to interface (and BIOS Parameter Block) increasing the sector number field to 32 bit, allowing 2 TB when using 512 byte sectors (*1).
DOS always maintained a strictly logical device interface and did not (and still does not) imply a certain sector size. The sector size can be anywhere between 1 and 65525 bytes. It is defined by a 16 bit value at Offset 0Bh within the BIOS Parameter Block (*2). For all practical means only power of two values between 32 and 32768 are useful and only values between 128 and 8192 do work with (most) DOS versions (*3).
With a block size of 512, as IBM selected for its first hard disk, the maximum number of 65536 sectors will limit the logical disk size to 32 MiB. To support drives larger than 32 MiB vendors could either
- present it as multiple logical drives (*4) or
- use a larger logical sector size.
While the first would limit the use of truly large files, the late would come at cost of more waste - the usual trade of between size of management unit vs. useful data.
Of course, using larger sectors will also mean DOS needs to reserve more buffer space of the limited main memory - not cool with 640 KiB or less total RAM.
Those sectors are named 'logical' as they are not necessary the same size than the physical sector. If not, it was the task of the vendor specific device driver to block and deblock sectors.
In fact, larger disks were often still using 512 byte sectors on disk level, so all that number juggling was just to get around the interface limitation - much like with later INT 13h games.
*1 - In fact, all of this does sound a lot like the more recent discussion of 4 KiB block sizes to increase physical drive capacity and thruput.
*2 - Before 2.0 those values where fixed tied to the media descriptor. IBM for example used values of 128 and 1024 some 8" disks.
*3 - Microsoft's official FAT paper (fatgen103.pdf) does only name sizes of 512 to 4096 bytes as valid for MS-DOS (p.9). In contrast MS' own KB entry Q75131 mentions 128 bytes for media type FE and FD.The paper seems to have been created in hindsight with less than perfect knowledge, containing several errors (explanation of the 10ms time value at 0Dh is for example complete nonsense).
*4 - Using the partitioning scheme introduced with DOS 2.0 (MBR) - or before DOS 2.0 using some vendor specific scheme implemented in their driver.