You want to put it either in recovery or DFU mode. Tutorials can easily be found on the internet for either of these. In cases like these, jailbreaking before restoring to the official firmware can sometimes help as well.
I just fixed my 1g touch yesterday. sounds like you got same prob i had and i found, after a day trying everything, this worked first time i did it. http://support.apple.com/kb/ht1808 first ever post after over 1 1/2yrs! coming here!!
THAT IS HILARIOUS! This problem started yesterday for me! That is so weird! 2 iTouch 1G have the same problem on the same day! WEIRD!!!
If you still have warranty, then you can bring it in to an Apple store and get it replaced with a refurbished one
iv always wonder if that extend warranty is worth it.. i know in new cars its not. my logic has always been if nothing breaks in the first 90s days you own it. chances are nothing will happen. my warranty expired on my 2g ipod 2 months ago. chris.