I'm having the exact same problem! Here's what i did:
1) Realized my network was assigning a bogus dynamic IP to my iTouch
2) Switched to a static IP, with definately the correct numbers and such
3) Noticed that i was now getting bars, so i thought it was fixed
NOTE: I had a very similar problem with my X-Box, and switching to a static IP fixed it.
4) Tried to go on the internet, and got the "connecting" thing
W.T.F. Since i now have no idea what to do now, here are my theories:
A) Too many firewalls or something. I've observed my house having abnormally large ping/latency when i was playing online games, which i've determined is definately caused by something in my house, not the game servers. I know we have lots of security stuff for my internet, so it's possible firewalls are interfering with connections, including my iTouch.
B) Theres simply a bug in the software.
C) I dropped my iTouch too many times. Highly unlikely since this problem has been there since Christmas Day when i first opened it.
D) Since my iTouch is connecting to my network, but not the internet, that implies my router has a grudge against my iTouch, or the iTouch doesn't know how to use a router or something. This might fall under "software bug".