CD's must be used
Even if you could play from USB, USB on the PS2 is so slow there would be issues with most games not being able to stream the data fast enough
CD images must not be *.iso format because of the limitations of that format, but common ones are bin+cue and img+ccd (sometimes they come multiple bin files and a cue or bin+wav files and a cue) both cue a cdd files are descriptor files and that is what you burn from, they are tons of other CD disc image formats though too many to list
The other option is via Pops emulation for PS2 but you need to be running that from an internal IDE HDD (Not from a USB HDD)
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