How do I update my iPod?

So far, I have connected my iPod (iOS 4.3.3) to my computer and signed in to my iTunes, but, all I'm getting from this is an error stating this message: "This iPod cannot be used because the Apple Mobile Device service is not started."

All of the other questions told me to simply go on iTunes, but my iPod cannot connect to it because of that error.

Also, when I update my iPod, do I still keep my applications? On many of them I have used countless times and I do not want to lose what I have done.

I would be highly grateful if I recieve a full answer explaining the process of sorting the problem and successfully update to the lates iOS my iPod can go.

Thank you.