I was in your shoes a matter of minutes ago. But thankfully, after 5 hours of searching I found a fix...only to loose the URL. Here's my version of it: (Credit goes to those who found it first)
1) Uninstall any iTunes related programs. This includes iTunes it self and any updater programs.
2) Make sure your iPod is disconnected from your computer and do a reset
3) Download and install a program called "HP USB Disk Storage Format Tool"
4) Connect your iPod using the USB cable. Wait about 3 minutes to let the PC do its work.
5) Open the HP USB disk tool. Select the iPod in the device drop down box. Also select Fat 32 in the file system. Leave everything else alone.
6) Hit start and wait. Do not use your PC for anything else at this time.
7) A box confirming deletion will pop up. Select YES.
8) Let it do the format. Again, don't use your PC for anything else at this time.
9) You should get a pop up saying the format was complete. Close all windows currently open now.
10) Using the Safety Removal Hardware icon in the task bar, stop the iPod and when its safe remove the cable from the iPod.
11) Install iTunes and the 2006-03-23 (my birthday
) and restore your iPod.
This should fix any problems you have. It fixed mine and I'm happily listening to it now.
Moral of the story: The Nano and the latest fix don't get along.