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Mine does dim slightly in a Dark room but I find that by doing so you lose even more colors and contrast, they really need to add not only a brightness setting by a Contrast setting as well to compensate for the screens lack of black level.
 
I've noticed that when you use Your iTouch in a sunny area and put it to sleep and then go to a room or a dark area in general and open it, it remembers the settings of the sunny area (as a result it's very bright..). So I just put it to sleep and bring it back again to adjust in the new light conditions. This happens almost everytime. ( Not a jailbroken ipod).. I can't understand what's wrong with it..

hm....haven't actually waited 5 secs for the sensor to readjust.. Maybe you have to wait..

OK done the test. Conditions : dark room. itouch brightness: dim (working so far) threw my cell's flashligh right at the sensor. Screen actually got brighter! (working so far! ) turned off flashlight.. waited about 10 secs.. screen's brightness didn't return to normal... ( sniff sniff.. ) had to put it to sleep and wake it for the brightness to return to normal..

So I guess the answer is to put it to sleep and wake it
 
I farted, pulled my Touch from my back pocket, and the screen was a greenish hue. Does it also have a smell sensor? Well done, Mr. Jobs!
 
Mine does not work at startup, only when I put it to sleep and then bring it back from sleep does auto brightness work. Seem lame that it doesn't change the screen brightness on the fly. Its hardly automatic if I have to put it to sleep and then wake it for the thing to work.
 
Mine does not work at startup, only when I put it to sleep and then bring it back from sleep does auto brightness work. Seem lame that it doesn't change the screen brightness on the fly. Its hardly automatic if I have to put it to sleep and then wake it for the thing to work.

Sounds like yours has an issue; mine works from the get-go.
 
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