No, the button will protrude slightly with the loop installed. I use a case on the back of mine, so that's not an issue and my Touch sits perfectly flat.
I find the loop pretty durable. Have been using it since I took delivery, early October 2012. The only time I use it around my wrist is when I'm out and about in the stores (I keep my shopping lists on my Touch).
I keep the loop on because it makes it pretty easy to find my Touch inside my home.