By the looks of things the guys over at Last.fm are on the verge of releasing an update for their iPhone/Ipod Touch app that addresses the known issue with Apples V2.1 firmware.
Since updating to V2.1 firmware users have been left with a completely broken app. According to this thread the fix should be released to Apple this week. Heres hoping Apple don’t decide to do the dirty on Last.fm as they have done with Podcaster
It's worth adding that if your iPod refuses to go into Disk Mode and you hear a noticeable clicking sound the problem might just be corrosion on the HDD cable and will need cleaned periodically.
ipod fix