Hi I have a 2nd generation iPod touch. The headphone jack has not worked properly for a while now but it has been fine with my earphones. When I use an aux cable, I have to move the cable around to get any sound.
A couple of days ago, the earphones that I regularly use and anything that worked does not any more. When listening to music, I can hear the tune but not the singer or any beats. When I pull the cable out a little, I can hear everything and it is all working fine.
The problem started after I lent it to my friend. I went to plug my earphones it and I realised the black plastic around the headphone jack does not stick out has much as it did before.
I got a lot of fluff out of my 1st gen ipod Touch's headphone jack. The audio would be fine if I used my Apple headphones (but they have completely fallen apart, 3rd replacement set from Apple) but with third party headphones I had the same problem as you described.
This post probably saved me over $100! I was worried that I was too hard on my jacks, because my iPod classic's jack wasn't working, then my iTouch stopped working. But I used some tweezers and cleared out the jacks, and now they work perfectly!