plug the ipod into itunes. reset it by holding the home button and lock button down. once you see the screen go back keep holding down for about 8 seconds. after that let go of the lock button and keep holding the home button until itunes picks up the ipod in recovery mode. then you can restore it with no problem. if you see the apple logo come up you've held down for more than 8 seconds and try again.
this is called a dfu restore which will 100% fix your issue.