Here is an earlier post that I had kept from another forum. May be this will help.
The problem with the ipod looping in recovery mode boils down to the drive letter assigned to the ipod used by a networked drive. I have provided a link to the support document that outline the steps to change the ipod's drive letter. Or, you can change the networked drive letter.
NOTE: this applies to the Windows Vista OS/Windows XP Pro...
Here is how to physically change the letter drive, here's how (at least for people using Windows XP):
1. Go to where you see the 'My Computer' icon. Right click it and click on 'Manage.' This opens up a 'Computer Management' window.
2. Double click on the 'Disk Management' which is on the left hand side of the window. It will show on the right side a list of all the current drives (whether external or internal or otherwise) and their current letter assignment. Check that screen with your listing of drives (double click My Computer and it will list all the letter drives you're connected to at the time) to see if there is a conflict.
3. If there is, then right click the listing for your ipod and click on 'Change Drive Letter and Paths..' This is where you change the drive, but be sure to change it to something that is unused, or you won't be solving anything.
Hope this will help...Let us know who it is working out.