Q: " itunes could not contact the ipod software update server because you are not connected to the internet " . but my itunes store and internet works. what should i do?

Temporarily disable your firewall and antivirus software and try again...

See here for Connection Issues

http://support.apple.com/kb/TS1379

From Here

http://www.apple.com/support/itunes/troubleshooting/

Perhaps also see the following document:

iTunes for Windows: iTunes cannot contact the iPhone, iPad, or iPod software update server

i had this same problem. computer was connected to the internet. other devices connected and working too... but for some reason my itunes update SPECIFICALLY was not recognising the internet connection. 

so after much frustration with my firewall settings, i decided to look into it in a different perspective... instead of looking for solutions for itunes not connecting to the internet... start looking for solutions for problems relating to the computer not allowing certain programs to recognise a connection.

low and behold, I found a link and I found that my advanced internet settings were messed with... just a "reset to default settings" and i was golden.

heres the link that i found: http://answers.yahoo.com/question/index?qid=20101004001351AA7Ok8a

hope it helps!