As others have mentioned, and I can confirm from personal testing, you can boot OS X from an iPod. I have done it with a nano as well as a 30 GB 3G iPod. (Took a lot of work to shrink Tiger down to 4 GB to fit on my nano, though.)
The trick is to do the install to an internal drive, (which, yes, means wiping your internal drive if you have only one, and it has more stuff there than will fit on your iPod,) then using a tool like CarbonCopyCloner to copy your internal hard drive to the iPod.
One caveat. If you are using an Intel Mac, you will have to repartition your iPod using Disk Utility, making sure to select 'GUID Partition Table' under 'options'. This has the effect of making the iPod unusable as an iPod, though. (iPods will only work if they are 'Apple Partition Map' for a Mac-only iPod, or 'Master Boot Record' for a Windows-compatible iPod.) That is correct, if you try to use the iPod's interface, it will give you an error. I haven't tried, but it would seem possible to boot a PowerPC Mac from an 'Apple Partition Map'ped iPod, and still retain iPod functionality.