If it's a mac-formatted iPod, you may have to download the optional iPod support update from the marketplace, even for it to mount as a USB drive, so that the 360 will recognise the filesystem it's formatted to (since it'll be HFS+, not FAT32 or NTFS).
Where you'll find this is anyone's guess now they've revamped marketplace, it used to be somewhere like 'all game downloads>ipod'.
If you've already downloaded it, maybe it's got corrupted or something, you could try deleting it from your console and redownloading it.
If you have a Windows-formatted iPod, I have no idea what's wrong.