I've had an identical error. The ipod touch screen showed a graphic of the lead connecting to itunes and wouldn't move beyond that point. I plugged the pod into a second computer and that brought up a message saying it was in recovery. It proceeded to reset the pod - but only on the third attempt. I've lost the January software update and have asked Apple, via the itunes 'report a problem' link, for advice on how to recover the software without additional expense.
Previous software upgrades were uneventful. I will be cautious in the future and wait a few days until issues like this have been noted and resolved.
Tonight I have downloaded the newest firmware 1.1.4. After I downloaded and tried to update. I am now getting this error message from Itunes. 'iPod' could not be restored. An unknown error occurred 6. I tried going through the recovery process but I keep getting the same error message.