Hi this unfortunately happened to me yesterday. I was loading new CD's onto itunes when a message box popped up to say 'New version of itunes is available do you want to install now' so of course I clicked Yes. However horrors my ipod then completely froze causing error message, was told to click Restore by iTunes but this would not work, ipod was locked with cd disc music note symbol and usb symbol. When disconnected ipod was blank. I searched Google for solutions and most said to press and hold the home and power buttons together and iTunes would restore. However this did not work for me, tried 5 times but still kept getting error messages.
In desperation the next day I telephoned Apple Helpline and spent 45 minutes talking to the guy on the phone. It turned out that my problem was that I was on a computer using Microsoft XP and although it seemed to accept 10.4 update ok, something must have been missing as it could not restore the ipod. The only way we could sort it was by me going on an up-to-date laptop which used Windows 7, I then downloaded iTunes to this laptop and then connected 'dead' ipod. The iTunes on this laptop recognised that the ipod needed restoring and proceeded to update it properly and restore was completed without any further problems.
Unfortunately it was back to factory settings with no previous music downloaded but the guy was very helpful and said if I emailed
apple.com/uk/support/itunes there would be a form I could fill in to tell them I had lost previous items and they would check my account and resend anything I had previously purchased for free.
Hope this helps some of you and avoids you having a sleepless night like I had