"There isn't an aac to mp3 converter in iTunes"
That is incorrect. If you have selected the format of mp3 in the importing options, then highlight all your songs in iTunes, use the "advanced/convert to mp3" option, or right click on the songs and select "convert to mp3". This will create a duplicate of all your songs in mp3 format, so you will have to delete the aac ones if you no longer want them, and of course you'll have to transfer the mp3 songs to your iPod.
However, what iTunes will
not do is convert the songs purchased from the iTunes MS, as these aac songs are DRM protected. The way to get around this is to burn these songs to an audio cd, then import this cd into iTunes as you would any other.
Please note that converting songs in both the methods I've mentioned, will compress an already compressed file, and as a result you may notice a reduction in sound quality, although this may not be sufficient to bother you.
"I understand that mp3 format takes up more space on the iPod as well"
Again, this isn't so. The same song imported in either mp3 or aac
at the same settings gives a file size that is almost identical.