Sorry if this has been posted before, but whenever I'm listening to the iPod and I go into Settings the music stops. Bug, or does Apple have it set this way?
No, it's a feature.
Why on earth would that be expected behavior?
Report it to Apple.
Doesn't work that way for me. Try resetting your phone and see if it fixes it.
I'd try restoring to a new phone.
EDIT: Glad you got it fixed.