I also tried reformating the iPod with Disk Utility. I was able to format but not with 'zero out data' selected (recommended for fixing bad blocks). I even tried changing the partition map through terminal but was unsuccessful.
You can try the following procedure which worked for me.
Caution: This will erase all data on your iPod.
- Using iTunes restore iPod. Uncheck both the 'Sync Music Automatically' check box and the 'open iTunes when this iPod is connected' checkbox.
- Eject the iPod and close iTunes.
- Restart the iPod in disk mode (Menu+Select then Menu+Play/Pause).
- Open Disk Utility, and in the sidebar select 'Apple iPod Media.' Go to File » New » Disk Image from 'disk1' (or whatever name appears last on this menu).
- Save the disk image on your HD. You will later use it to restore one of the partitions.
- Now, again select 'Apple iPod Media' in the Disk Utility sidebar, and then the 'Partition' tab.
- Under the 'Volume Schemes' pulldown menu select '2 partitions.'
- Select the first partition and assign it a size of 4gb or 6gb (I think this was large enough to 'skip' the bad sector). Under the format pulldown menu select 'Free Space.'
- Select the second partition and under the format pulldown menu select 'Mac OS Extended (journaled)' and name the partition (you can later change the name).
- Now click 'Apply' in the bottom right corner
- In the Disk Utility sidebar you should now see the disk 'Apple iPod Media', as seen before, and beneath it should be the partition you named earlier.
- Click on the icon of the new named partition in the sidebar and it's capacity should be the full capacity of the disk minus the amount allocated to the partition 'Free Space' (e.g. my iPod Classic is 120gb and I allocated 6gb to the 'Free Space' partition so the size of my second partition is about 114gb).
- Now quit Disk Utility and restart the iPod in disk mode as before.
- Open Disk Utility and go to Images » Scan Image for Restore and select the disk image you saved earlier.
- From Disk Utility select the 'Restore' tab.
- Under source select 'image' and navigate to where you saved the disk image.
- Under destination drag and drop, from the Disk Utility sidebar, the icon of the new named partition on the iPod.
- Click Restore.
- Eject the iPod and restart it.
- Open iTunes and you should now see the iPod icon
[crarko adds: I haven't tested this one. I suspect the author just got lucky that this worked when deleting the partition with the bad blocks. They could be anywhere on the drive, and the drive may continue to deteriorate. Having said that, as a last-ditch effort to resuscitate a dying iPod I suppose this is worth trying. As with any other storage device you care about, keep those backups up-to-date.]

