Lose old library if setup new ipod as new to escape restore from bkup loop?

I just bought an iPod Touch 5th gen. I hope to give my 2nd gen iPod Touch to my daughter. However, I am stuck in a 'restore from back up' loop. No error messages, just get the same start over screen again and again.
First, I backed up old iPod to old XP computer. Then accidentally set up New one as new. Did not see any of my music except purchased.
I plugged in Old, and it told me that it was tied to another library, but would never tell me how to get to it. Just told me I could erase and sync to this empty one.
I started over on my newer Windows 7 computer and installed lastest iTunes and backed up Old iPod on it. Then, I tried to Restore my New iPod from the Old one's backup. It appeared to work, but when the New one rebooted, it asked for me to pick language, country, wi-fi settings and setup/backup choice again. I have been stuck there ever since. I can not get to anything else on New iPod.
I have put it into DFU recover mode and reset it and then selected the restore from backup process again, but didn't help. After much research, I changed USB ports and turned off my Noton Security, but didn't matter. I am at a loss now.
So, if I now set the New one up as new, will I lose all access to old library containing over 1600 songs from CDs in addition to the 450 some songs I purchased under that account?
Advice, please. Is there a way to get out of this loop or do I just need to take the ipod back to the store? Please assume I am clueless and explain steps.
Thanks....

You said "So, if I now set the New one up as new, will I lose all access to old library containing over 1600 songs from CDs in addition to the 450 some songs I purchased under that account?"
I do not understand you concern since the iPod backup that iTunes makes does not include any synced media like apps and music,
Therefroe, try restoring fo factory settings/new iPod.
Also see if you missed anything here:
Restore loop (being prompted to restore again after a restore successfully completes)
Troubleshoot your USB connection. If the issue persists, out-of-date or incorrectly configured third-party security software may be causing this issue. Please follow Troubleshooting security software issues. .
Next try placing in DFU mode and then restoring.
How to put iPod touch / iPhone into DFU mode « Karthik's scribblings
Then try restoring on another computer.
Last, make an appointment at the Genius Bar of an Apple store.
Apple Retail Store - Genius Bar
Further
You can redownload most iTunes purchases by:
Downloading past purchases from the App Store, iBookstore, and iTunes Store

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