How does the automatic brightness works?

There is a small light sensor at the top.
You can disable it by:
Settings>Brightness> Auto - Brightness- OFF.

 

It has an ambient light sensor. No automatic thing is faultless. It can be affected by as little as the light from the screen being reflected off your face.

 

You may also have a case that causes this. On iPhones it usually results in a dim screen as opposed to a brightly lit one. This can happen if you use a case designed for a 3G with a 3GS, or in the case of an iPod touch, one meant for use with a 1st/2nd gen when you have a 3rd.

 

A 2 second google image search brought up:



I can confirm this is where the ambient light sensor is, you can see it in certain strong light.

It checks for light when you lock/unlock the iPod.

 

FWIW, the 2nd/3rd Gen iPod Touches are identical in their physical sizes, it's the 1st Gen that's different. Your point still makes sense, just wanted to clear up that point.

 

Second- and third-generation Touches DO have the same physical size, but the 3G has the light sensor in a different place. If you have something like an Otterbox (which was never updated for the 3G), the iPod will fit, but the light sensor will be blocked by the case.

 

I would just turn it off. Useless feature anyways.