Update it from iTunes on a computer as described at the bottom of this article; devices running an iOS version prior to 5.0 can't be updated straight from the device. It will be updated to the newest iOS release supported by the device’s hardware.
The maximum iOS version for the first generation iPod touch and original iPhone is 3.1.3.
The maximum iOS version for the second generation iPod touch and the iPhone 3G is 4.2.1.
The maximum iOS version for the third generation iPod touch and original iPad is 5.1.1.
The maximum iOS version for the fourth generation iPod touch and iPhone 3GS is 6.1.6.
If you don't know what device you have, append the last three characters of its serial number to http://www.everymac.com/ultimate-mac-lookup/?search_keywords= and load the page.
I suspect you have a 2G iPod. Those can only go to iOS 4.2.1. Or a 11G, thos can only go to 3.1.3
iPod touch (3rd generation)
iPod touch (3rd generation) features a 3.5-inch (diagonal) widescreen multi-touch display and 32 GB or 64 GB flash drive. You can browse the web with Safari and watch YouTube videos with Wi-Fi. You can also search, preview, and buy songs from the iTunes Wi-Fi Music Store on iPod touch.
The iPod touch (3rd generation) can be distinguished from iPod touch (2nd generation) by looking at the back of the device. In the text below the engraving, look for the model number. iPod touch (2nd generation) is model A1288, and iPod touch (3rd generation) is model A1318.