This is the most frustrating thing. Having learned that for my iPod Photo, I've been having repeated hangs when plugging it into the PC to dock. It is a strange condition, I see a small icon appear in the tool bar. Cliclking on it, I get a standard dialog that says what action do you want Windows to take and the box is completely blank.
It looks to me like XP is getting confused about what files are this iPod. That is, the drive is somehow confusing it. There is some strange heuristic in Windows where it looks for picture, video, music to guess what to do with a new USB hard drive (which is what an iPod looks like). I have chkdsked the iPod and it seems fine, so I tried to reset it.
The iPod updater software actually hangs because it never gets there. Somehow the low level windows driver confuses it. Trolling the iPod support site and google is completely useless. Most folks are just asking what to do. As usual, Apple has five useless things to do, Reset it which I've done a zillion times, try another USB port, reinstall itunes and ipod updater and then try to do this restore thing.
The only thing that did help was to find out about "disk mode". This appears to be some mysterious mode that you get into where the iPod does less (it is not documented what it means). In any case, you have a three step sequence. Turn the Hold on and off, then press menu and select simultaneously. then while you have the apple, press select and play immediately.
This was enough to get it into a state where it could get restored as noted in this piece. Putting iPod into Disk Mode