Downgrading is more difficult than upgrading, unless of course you're like me and your iPod crashed from the upgrade. If you want to downgrade but can't seem to make it work on iTunes, you can take it to the Apple store. They won't jailbreak it due to legal reasons, but they can at least help you with the software problem so that you can do the jailbreak.
In theory, you should be able to do like you said, and restore the old software. However, iTunes can be a brat when it comes to that sort of thing.
If the warranty isn't up yet, you can call the Apple support line. They probably won't help you over the phone if the warranty is up, but its worth a shot. You can also try the FAQ on their website.
iPod Troubleshooting
Apple Phone/Contact Support
Genuis Bar (In-store help) Reservations page
Hope this helps.
CrackerJax
-------
CrackWaffles
-Molly/17-
Message me for my AIM, MSN & Yahoo