I think I have figured out what is happening.
I had the same problem, and couldn't understand why the supposedly fixed line level was so extremely low suddenly.
As it turns out it is possible to change the volume of the line out signal using the normal volume control even when the nano is in the dock!
When the nano is placed in the dock the volume is pre-set to the correct one, BUT if you manually turn the volume up to maximum level, then the line out signal is muted!
I guess the volume should really be fixed, or at least not adjustable via the normal wheel, when the nano is in the dock. Why max level mutes line out is anybody's guess...
(I use the new universal dock.)