I had the same problem took 20 - 30 attempts at it but I finally got the damn thing to show dfu instructions.
with the devide at the home screen and hucked up to pc/mac just power off as normal, next when ipod is off hold the hole and sleep keys for 10 seconds, after you come to 10 let go of the sleep key and keep holding the home button in about 10 - 15 seconds your mac/pc your in dfu mode, nothing will be on the ipod screen and it will look as though the ipod is off, if you open itunes it should say ipod detected in recovery, now you just retry the pwnage tool