Check your iPod with Diagnostics Mode
It is possible that your iPod's hard drive has started to fail. Take your iPod and place your right thumb on the centreSELECT button and your left on the top MENU button. Press down both thumbs for about 6 seconds until your iPod reboots. Immediately move your left thumb around to the rewind button |<< on the left and hold this down together withSELECT for a further 6 seconds. Your iPod should now switch into Diagnostic Boot mode. Press MENU for Manual Test, then select IO > HardDrive > HDSMARTData to reveal your stats.
press MENU+SELECT for 6 seconds to reset the iPod again.
Hold MENU+SELECT on the iPod for about 6 seconds until it resets, then switch to PLAY+SELECT as soon as the Apple logo appears, again for about 6 seconds to put the machine in disk mode. Open iTunes and in the Devices tab of the preferences menu check Prevent iPods, iPhones, and iPads from syncing automatically. Now connect your iPod to the computer, wait until it connects, then close iTunes.
Windows: Browse My Computer and right-click on the drive for the iPod, click Properties, then click Tools. Under Error-checking, click Check Now. Under Check disk options, select Scan for and attempt recovery of bad sectors (Optional - takes ages but a good idea if you've reason to suspect physical damage). Click Start.
If the device still won't restore normally try this method. Connect the device to the USB cable, press MENU+SELECT like a standard reset but keep holding for 12 seconds. The device should reboot as normal and then the screen should go blank. Now open iTunes and try to restore again.
yes, it does sound like the hardware has failed.