Troubleshoot your USB connection. If the issue persists, out-of-date or incorrectly configured third-party security software may be causing this issue. Please follow Troubleshooting security software issues. .
Next try placing the iPod in DFU mode and then restore.
The try on another computer.
The same thing happened to me, while restoring my iPod Touch Generation 5. I don't know if you are still caught in the same loop but this worked for me. I am using a MacBook Air running Mountain Lion version 10.8.2. iTunes is at version 11.0.
After running through the published Restore procedure without any success I found the Software Update file had downloaded as:
"/Users/my_home_directory/Library/iTunes/iPod Software Updates/iPod5,1_6.0.1_10A523_Restore.ipsw"
The ~/Library directory is invisible on my machine, more than likely a design standard. I used a terminal to first locate the file and then to copy the file to a readable location, my Desktop.
My iPod was still stuck in Recovery Mode so I plugged it in. iTunes was already running and identified the Recovery Mode iPod, prompting me to Restore it. I clicked OK.
I held the option key while clicking Restore. This opened a navitation window that enabled me to select the Software Update .ipsw file I had copied to my Desktop. The Restore process then ran without any failure and the iPod is now running again.
This is not a formal solution as far as I can tell, nor have I verified the procedure across multiple iPods, multiple scenarios, etc. I just wanted to share it as an "at-your-own-risk" alternative you might want to try.
Good luck, cupcakequeen83.
My new iPod Touch Gen 5 was stuck in a restore loop after failing to update to iOS 6.1.3 (before I even had a chance to use it). After several tries to restore and unsuccessful attempt to put it in DFU mode, it was still stuck in recovery mode. I then tried starcomm's approach and it worked perfectly. Very much appreciated!