Actually, I may have spoken too soon. I cautiously copied just my podscasts to the ipod and everything went to plan. The only problem was, at the end of the sync iTunes had a very long think then told me it could not be synched because of an error 13010.
I was annoyed so I looked at the hardware test you mentioned and noticed that the Realloc number was something like 2 or 3 thousand and somthing! Obviously at that point I felt all hope was lost, but I decided to use disk utility to write a bunch of zeros to the drive (the second most secure delete).
This reduced the Realloc number to 64. I then plugged the iPod back into the Mac in DFU mode and it once again performed a recovery. I chose to simply copy 1 random song to the iPod ('I'm not in love' by 10cc - lol!) and it took about 5 minutes to copy this and complete the sync. It told me the sync was complete and to eject the iPod. Upon pressing the eject button I then got the candy cane progress bar with a message saying "Synching iPod."
It eventually ejected successfully but upon reviwing the iPod there was no music. A quick hardware test then showed the Realloc number had climbed from 64 to 6242.
I think it's time to bid farewell to the iPod. Ah well, I got it in 2007 so that wasn't a bad run I suppose. But hey, TT2's help and advice here really helped me figure this out and come to accept the death of my lil iPod 🙂