I'm having the same issue on a 1st generation shuffle. Running the reset utility does not appear to solve this issue.
From my post on the same issue at iPod Forums (
http://forums.ilounge.com/showthread.php?p=1211599#post1211599):
+My uninformed guess is that this is an issue with the audio encoding. You used to hear this kind of frequency distortion on early (bad) MP3 codecs.+
+The problem described in the original post is not an issue with the headphone jack. It is rather like a karaoke effect where you kill the vocals by eliminating any signal in the "center" (instruments are panned right or left).+