Hello, Welcome to discussions.
Just to confirm
-iPod Touch is able to see the name of the network in the house
-iPod Touch sees the network as protected and requests password when you tap on WiFi network name
-iPod Touch comes back stating the password you used for this network is not correct. Even though this password works on other devices needing to connect to the WiFi network.
*Couple links and tips below to assist
-Tips
*Ensure the router has up to date firmware software installed if needed
*Ensure iPod Touch has had proper updates done to it as well
http://www.apple.com/ipodtouch/softwareupdate.html
*Try typing your WiFi password again but use a $ first then type rest of password
*Try disabling WiFi security, update, and see if iPod Touch can connect. If it does then you had a security compatibility block or you might also be using Mac address filtering and need to add the iPod Touch WiFi Address into router.
-Can be found by going to Settings - General - About
*May want to try and use WEP 128 bit security 13 character password or WPA/WPA2 8 character or longer password.
iPod touch and iPhone: Tips when using Wi-Fi
http://support.apple.com/kb/TS1398