The speculation started as all the new dock-connected Apple audio accessories route their audio through a codec on the accessory itself. No conclusive evidence the 5G iPod can output digital audio of course, but having a codec in there just to re-sample incoming analog audio to do volume control on would be rather ludicrous.
The Universal dock for example taps the regular line out of pre-5G iPods, but the 5G audio goes through the codec on the dock. It also stands to reason that if the dock codec was capable of resampling an incoming analog signal and outputting it at different volumes, ther's no reason for that facility to be offered with just 5G iPod. But ultimately, who knows. Apple have never been a company to show any of their cards.
Technically speaking, virtually all of today's mainstream players offer a line out. The iPod offers it, the Creative Zen Vision M does, the iRiver H10 does with the cradle (or by setting the headphone at full volume and turning off all effects), and the iAudio's do as well.