It is true that an iPod Touch 2G cannot be updated pass iOS 4.2.1. However, you must have an MC model of the iPod Touch 2G. In that case, use Jailbreakme 3.0. As for performance, I do not suggest using too many tweaks. I speak from experience... Luckily, I have the MB model of the iPod Touch 2G, so I more breathing space for jailbreaking, unjailbreaking, or restoring to custom firmware.
If you do not mind, can you go to the settings app > General > About and checking the model number, whether it is MB or MC.