I have a drop-down list that gets populated based on a stored-procedure - that parts works fine.
From above you would have figured out to add Select All using Union to your dataset Query.
Now to select "ALL" as default value, rightly mentioned above setting it to specific value Null won't work; instead I used specific query and used same dataset I used to fill my dropdown parameter and it worked.
Note : My dataset was sorted ascending and ___ALL__ came at top with value as Null.