The silver circle on the back of the ipod (bottom left) is protruding, how do I get it to go back in and what is it for ?

The circle is for the iPod loop, if you have a 16 gig. then your iPod didn't come with the loop. To put the button back down simply press down on the button.

The iPod touch loop is a colorful way to keep your iPod touch at the ready.* That’s perfect for when you want to shoot from a hard-to-reach camera angle (and don’t want to risk it falling out of your hand). Flip iPod touch up to type a quick iMessage. Or just sport it when you’re pocketless. The loop also keeps your iPod touch safe, so you don’t have to worry about a slip, fumble, drop, or overzealous robot dance.