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MP3 players that record can work, but with limited success and limitations. Recording to an iPod specifically is not very practical.
Instead, there are a number of flash based recorders out there now. One you'll see often is the Gemini iKey, stay away from it. It apparently has bad sound quality, and has no internal storage or display.
In the $400 range, you have a few choices:
Edirol R-09
M-Audio MicroTrack II
Samson Zoom H4
In the $200 range:
Samson Zoom H2
Of all of them, the Microtrack probably has the best DJ-friendly options - pro inputs, better recording options, etc. The disadvantage is that it doesn't have a mic built-in (for live recording), and the battery is not user-replaceable.
The Edirol-R09 I've seen and used in person. It's super-tiny, so you can throw it in your pocket if you ever wanted to record something.
I now have the Zoom H2 myself. Mostly because it was half the cost of the others, it was released just this past august. It sounds great, it's relatively small, and with a $45 4-gig card you can record up to 6 hours at CD quality sound (27 hours in 320Kbps mp3). I use it at home, and have used it in a club with great results.
My one beef with it is that although it has a USB 2.0 interface, it operates at USB 1.1 speeds, so transferring files is super slow. So plan on getting a flash card reader. Would be nice to not have to take the card out, since they are so tiny... maybe an upgrade will fix the transfer rates.
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