I faced the same dilemma about a month ago. My 30g Classic died and it was overflowing with music. At about the time I bought the classic (3 years ago), I also bought my wife a Nano. Guess which one I took running. The classic was too bulky and it bounced all over the place. Also, it skipped a lot, especially when running downhill. Needless to say, my wife wasn't very happy that I hijacked her Nano for the last three years while my Classic rotted. Last month I needed to decide between the Nano, Touch, and Classic. Here's a quick list of questions to help you decide what you need:
1. How much music do you own/ want to own?
Since the Nano comes in 16g, the Touch is 32g and the Classic is now 160g (is that correct?), they all hold a lot of music compared to their old school versions. If you don't have or want a lot of music, then size really isn't an issue.
2. If size does metter, is sound quality an issue?
Music files can be shrunk down to create more space on whatever device you choose. This decreases sound quality just a bit, but most people never notice the drop-off with standard earbuds on an iPod. Note: if you plan on pluggin this device into your home theater system, you will notice the dropoff.
3. What else will you use this device for?
Other users have pointed out the advantages of the Touch.
4. Will the bigger, bulkier device bother you when you run?
It bothered me, but then I see people running with huge MP3 players and phones all the time.
Whatever you get, this is really a personal decision that hinges on the size of your library, personal preferrences and how you will use the machine. If I were you, I would also purchase a couple of running bands with whatever device you go with. Try out different combos over the course of a week and see if you're satisfied with what you have. If not, return what you purchased and consider the other device. I went with the 16G Nano. It's great and my wife has her Nano back...