After a month of fighting with my car to play music from my 1G iPod Touch, and multiple resets, I gave up and switched to my old iPod Nano instead, as a test. I had the same problem - Sync would lock up and freeze, or not work at all when trying to play music from my iTouch.
For some reason, the Nano gave me no issues whatsoever. The iTouch (and perhaps the iPad) might have some compatiblity issues due to iOS. I've since sent in my old Nano to Apple for a free replacement (battery meltdown risk), and the new Nano has been awesome.
Joined the dark side.