My 7 year old son wants an iPod too. My 5 year old hasn't expressed any such interest. I can't believe that my 7 year old is really going to use the thing much seeing how he hasn't expressed a lot of interest in music (he likes music, of course, but it's not something he's clamoring for.) I think he wants one because his similar age cousins got them for their birthdays and because it's a gadget and he's come to love gadgets because, well, I love them. 🙂 Fortunately what his cousins have gotten are iPod shuffles and so that's what he wants. I really can't see getting him an iPod nano or higher. Actually he'd probably use the nano more, but just because it has games on it. Given that, I'd rather get him a shuffle and a game for his Nintendo DS. Perhaps having a shuffle will get him more interested in music. So, I think it's at least harmless enough, and the shuffle, especially a refurb shuffle, isn't a lot of money.
However, if your child does have a lot of interest in music, then I think it could be a good idea, and in that case a nano could be a good choice. One nice thing about the iPods is that you can set a volume limit - the one thing I'd worry about is them playing the music too loud, so the volume limit (which can be password blocked), is a good thing. I'm pretty sure the iPod shuffle has a volume limit option too, but I don't actually know how that works. Do you set it in iTunes? On the iPod nano and higher you set it on the iPod.