Sure, the 5G can be used as a drive; you just need to check the "Enable disk use" box (and click the Apply button) in the Summary tab of the iPod's sync settings window in iTunes.
Not sure of the current status of using low-level repair utils; in the past, Apple has advised against them (but maybe that was just to avoid iPod software problems from block re-mapping or people getting creative with partitions)....
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