You don't need a driver as the Touch can't be used by windows anyway. It can only be used by iTunes.
Cancel or ignore the driver searching and use iTunes which will automatically pick up the iPod.
I tried opening itunes, my IPT is not detected. Even with itunes open, the "new hardware" window still opens up. Tried different usb ports and still no luck.
iPod touch DOES require a driver. The driver which initiates iTunes to look for the iPod touch is called the 'Apple iBoot' Driver and it comes bundled within iTunes. I suggest if this driver is not functioning, as the device is not being recognized, that you completely uninstall iTunes and re-install it again. This way you can ensure you get a new non-corrupt copy of the driver.