iOS 4.2.1 suggests that you may have 2nd generation Touch, which cannot be updated past iOS 4.2.1
Check http://support.apple.com/kb/HT1353 for help in identifying your model. A quicker method may be to check the back casing. If your iPod has Model No.A 1288 etched into it, then it's a 2nd gen Touch.
Assuming that you are using the latest version of iTunes (today, that is 10.6.3), to check if your iPod can be updated, connect it to your iTunes and look on the Device/Summary pane. Select Check for Updates. If there is one, you will see a message telling you that and how to install it. However, if you see a message saying that your iPod is up-to-date, then it cannot be updated.