Does the icon show in iTunes?
When you right cliock on that icon does it offer Turn Off Syncing or Turn off Streaming?
If the latter the connection has somehow become streaming only.
In Settings>Computers the top option needs to be configured for the iTunes library you want to sync. See:
The first link (which I think I've used in error somewhere recently) is to AppleTV 1 running software 1.x with the old Sources option (which I quite liked), the one for current software is the one I listed and it's sometimes a struggle to find as the other appears more often in searches for me!
Didn't mean to sound critical - the sync/stream differences are very valid, it's the Sources bit that can confuse. Sources is mentioned in the text too which was only present in 1.x AppleTV 1 software. Reading it quickly the 'Connect to iTunes' may be backwards compared to practice in Settings>Computers i.e. on 1.x that was to set up a share whereas now we have add shared library.
I only mention it as I'm sure I've either posted this link or someone has found it and got incredibly confused cause they couldn't find Sources on AppleTv 1 with up to date firmware. Personally I'm glad they've still got the old 1.x article - I found Sources quite intuitive compared to My Shared and all that. I always felt that confusion over sync/sharing was something Apple could have done better with.
It's even more confusing with the new devices in my view as there are so many ways to do things that have similar results - Airplay is a particular source of confusion when people try to Airplay/Airplay Mirror content from a Mac when they would be better off navigating under Computers on the new devices.