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Your battery is dying and you are in need of a replacement battery. If it's still under the warranty take it to the apple store. If not you can buy a replacement battery off ebay for like $20 and do the job yourself.
 
Ive had my iPod Touch (2G) for almost two years now, and used this thing a lot. Probably a charge every 2-3 days now.. but for the first year I had it, it was probably every day.

I do see the battery indicator to be off though. I'll be surfing the web, get the 20% warning, and then maybe I'll watch a video and I'll get the 10% warning soon after. So I put the device on sleep mode and come back like an hour later, and my battery is no longer in red, and it looks like it's close to 30% battery life. I don't get it.
 
Better performane

I think my iTouch battery performs better with 4.3, when idle it still 100% for all night even with WiFi on.
 
My iPod Touch will notice me only 20% left, so, what's going on with your iPod Touch battery
 
It not uncommon for new devices to incorrectly report battery charge percentage, it should settle down after a couple of full charge\discharge cycles after which just give it regular topups rather than full cycle charges.

How much is a couple charges because i have charged mine about 3 times and it still gives me false reports on the battery percentage?
 
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