I had the exact same problem a week back, but i managed to fix it. Not sure if it'll help you though.
I think the Yahoo! on mail app is for yahoo address on the US servers, but i'm in the UK, so i think they have different server settings thats why it didnt work.
I went to my yahoo mail settings, pop and forwarding, to view the settings.
Next go to ipod touch and choose other (or settings, mail, add account, other), input the correct settings and it should work (might take couple of mins)
On my yahoo account it says my pop settings were:
Server Settings
Incoming Mail Server (POP3): pop.mail.yahoo.co.uk
Use SSL, port: 995
Outgoing Mail Server (SMTP): smtp.mail.yahoo.co.uk
Use SSL, port: 465, use authentication
Account Name/Username: yourusername
Email address:
yourusername@yahoo.co.uk
Password: Your Yahoo! Mail password
Hope this helps