It sounds very much as if your headset jack has gone bad, which is definitely a hardware problem. If your iPod is still under warranty, you should either send it off to Apple or take it to your nearest Apple Store. I had the headset jack on my 60gig with Video go bad while under warranty. It's a not uncommon problem as the jack gets a fair amount of stress.
If the iPod isn't under warranty, I'd check out a third party repair outfit such as iresq.com (this should in no way be considered an endorsement as I've never used them). For out of warranty repairs, they're usually cheaper than Apple.
Best of luck.