In the end the only thing to do was to copy boot partition from 4 GB SD to 256 MB SD card. That was it! This time I'm not going into detail at any level.
Why would you like to use USB stick instead of normal SD card? As far as I know SD cards have limited read/write cycles. In addition USB sticks are inexpensive and can be found everywhere.
First I had a 4 GB micro SD (with adapter)
and a 4 GB USB stick
4 GB micro SD boots Raspi and USB stick
takes care of the rest of it. All apps are on USB.
Finally I copied boot partition from 4 GB
SD card onto an obsolete 256 MB SD card.