For music ONLY I'm not a big fan of the iPhone/iPod Touch as you pretty much have to look at the screen to do anything. I bought my Nano for workouts, jogging, yard work and such as once you queue up a playlist all controls are easy to use without actually looking at the screen.
But for all-around versatility, the iPhone/iPod Touch is hard to beat. Full iPod functionality + video's (which look good and with the right cables can be sent to a bigger TV screen) + Kindle reader + games available (some are VERY good) + excellent browsing experience (posting this from my iPhone right now in fact) + just about anything else you could want in a convergence device. I use the GPS function all the time as well now, but I don't recall if that is iPhone only or also available on the iPod Touch.
But if all you want is the music capabilities of an iPod and don't care about the rest, or you don't want to look at the screen to do simple crap like adjust the volume, then I'd say stick to a Nano or even a plain-jane iPod.
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