This HOWTO assumes your iPod space is less than your iTunes music collection. If this is not true you only need to make the "Empty" playlist, use the iPod Updater and the optional Disk Utility.
Caution: Read all warnings you get, if something goes wrong, you are on your own. There are no guaranties attached to this HOWTO. Something in your setup, hardware or in your iPod hardware might render your iPod useless. But if you are close to 1 hour playing time it is nearly useless anyway so you might as well try?
Preparation:
1. You should charge your iPod first.
Use Software Update in System preferences to download the latest iPod Updater (Or use link in sidebar).
2. Make one or more playlist that contains music that will fill your iPod 85 - 90%. Make one playlist with no music that you name "Empty".
Action:
3. Connect your iPod
4. Quit iTunes
5. Launch the iPod Updater from your Utilities folder.
Read the warning in the iPod Updater summary window and choose Restore. Read the warnings again and choose Restore once more (Or cancel if you are about to lose unique data. Are you using your iPod to store other data than music from iTunes?).
Then you will have to enter your password. The updater starts. Be patient on every step! Follow the instructions. When you are asked to unplug: do it and wait for the symbol on the iPod to tell you to replug. Wait some more for the summary window to reappear.
Then quit.
6. Start iTunes. iTunes kicks up iPod setup assistant.
iTunes asks you to give your iPod a name.
Deselect "Automatically update". Choose Next and Done.
7. In iTunes: Select the iPod and go into the iPod options.
Choose "Automatically update selected playlists only:"
Read the warning and choose Ok
Select the playlists you made and Ok. Fill up to max 85 - 90%. (There is no lower limit.)
The next time you want to remove and add some other music you first choose to sync with playlist "Empty" and then you choose your new playlist, while keeping minimum 10 - 15 % free space. ( This recommendation might be very conservative. You are free to try other limits. 5 % might be sufficient. )
This writes the music files in a contiguous way on the hard disk.
If you erase and add files in a normal manner you will get fragmentation. The iPod hard disk will have to work more to read your music and your battery will suffer.
8. (Optional) Quit iTunes. Start up your favorite "Disk Utility" and do a repair or as in my favorite disk utility DiskWarrior choose Rebuild.
Now you have to recharge the battery. That's it. If you are as lucky as me you can enjoy your iPod again for many hours.
