I would think that the 3g Nano or Shuffle would be a better fit.
Well, yes.
Let me clarify.
Agree that the iPod Touch is too big for the gym.
Personally, I have a 32GB Touch. I like it. But it is no Newton. The current Touch would need to be bigger and have more features to replace a Newton for functionality.
However, to shrink the current Touch to a Nano size, would reduced it's effectiveness as the screen would be too small IMHO. So I don't ever expect to see a iPod Touch Nano added to the iPod line.
I don't see why the full size touch can't have all the features you want, while a simpler touch would be a nano edition, just movies, music - on the go in a smaller package - maybe no bigger than 25% larger than a nano 3g and no heavier than another 35% - with 32gb, I'd buy one for sure, even at 250$ US
EDIT: BUT IT MUST have some kind of pause button at least - so you can pause without looking @ the screen.