Within YTube -many of the files have an option to watch in 'High Quality' -if you download that type of file which IS actually an MP4 You will be able to drag & drop straight into iTunes 'Movies' section which I assume will transfer to your iPod quite easily.......I'm longing to have one!- a video iPod that is. The one I have is vintage & only plays sound files....
Anyway I hope that works for you.
Sorry- I forgot about the download site I use to carry out the above mentioned download technique. Go to the link and just follow the site dialogue....
i use a free flv converter to solve such problem, it can help me download youtube video from youtube and then convert the downloaded video to video and audio for my cell phone and ipod.