3.1.1? That's not a new update. As you can see from the description of the old stand-alone iPod Updater software (before iTunes incorporated that function), the updater from 2006 had that same software version for your iPod model.
http://www.versiontracker.com/dyn/moreinfo/win/26925
I suspect that your iPod's hard drive had some kind of disk data corruption, and when connected to iTunes, iTunes was not able to see the software version on the iPod, and therefore offered to
upgrade the software. However, due to the disk data corruption, the installation is not working properly.
You should use the
Restore button (on the iPod's pane in iTunes) to erase the iPod, re-install the same 3.1.1 software (that you have probably used for the last 2+ years), and initialize the settings. Then re-sync your iPod.
If that does not resolve the issues, run Disk Utility with the iPod connected and iTunes NOT running. Go to the
Erase tab. Select the iPod's DRIVE (not the volume indented under the drive), and erase it. Once that procedure completes, quit Disk Utility and run iTunes. Immediately use the
Restore button. Then re-sync it as desired.
