The exact same thing has just happened to me last night. The earphones work, the EQ does nothing, the music is fine on the computer and I have been the whole way through the 5 Rs.
Try to use different earbuds or speakers. If it sounds like it sounds in your iTunes now then your earbuds are broken. Also make sure the plug for the earbuds is plugged in all the way.
happened to me too. i reset my nano several times but problem persisted. decided to sync again with my pc. After syncing, ipod sound went back to normal. works fine now