can't move playlists on ipod

In iTunes select the On-The-Go playlist. Don't select the one on the iPod.
Select all the songs and drag them from that playlist to the other playlist you want them on.

Which iPod?
Which iTunes?

When you sync the iPod to iTunes, it copies the On-The-Go created on the iPod back into iTunes.
If it is not doing this for some reason...
Go to Music -> Playlists, scroll to this On-The-Go then press and hold teh center button to add all the songs in this list to a new On-The-Go playlist. Save it then sync the iPod to move this new On-The-Go playlist into iTunes.

Are you certain that your iPod is set to auto-sync? If its in manual mode, it might still appear to "sync" if you click the Sync button, but it won't transfer the OTG playlist back to iTunes. So, is your iPod set to "Manually manage music and video"?

i used to be able to directly modify the songs from the itunes under the ipod menu...now its' grayed out

If the songs are grayed out under the iPod, it is set to auto-sync.

I made sure that the iPod is syncing up with the computer, clicked the sync button and all that. its automatic sync...all that..ya...

Then unplug the iPod, create a new On-The-Go playlist by selecting the playlist you want and press and hold the center button. The playlist name will flash 3 times.
Now go to Music -> PLaylists -> On-The-Go -> Save playlist.
This will save it as Playlist 1 in the iPod menu.
Now plug in the iPod and sync it and this playlist will get copied to iTunes.