Don't defrag your iPod's hard drive. It can lead to problems, and doesn't offer much in the way of a performance gain.
The iPod's hard drive was not designed to handle the large amount of write operations its takes to complete a defrag. A defrag puts a very large load on the drive and this will generate lots of heat. Heat and iPods do not mix very well. Excessive heat is one of the best ways to decrease the life of your battery.
A much safer way to "defrag" your iPod would be to simply do a
Restore on the iPod using the iPod Updater utility.