New Ipod Nano - won't update "not enough space" but its empty!!

My wife's iPod Nano is brand new (I have a Video iPod so iPods are not new to me!)
I get the message that the iPod cannot be updated because library is too big etc....
What I did:
I reinstalled iTunes.
Restored library and unticked all tracks.
Downloaded updater and restored iPod Nano.
Tried to update "only checked" tracks - didn't work. Restarted system - settings of "checked songs" were saved - got same message.
Tried unchecking this and doing "only sleceted playlists" with a playlist of 208MB (iPod Nano model is 1Gb) - still got same message.
Tried everything I can think of - still no joy
Adam

Thanks for the suggestion but I am not using it as Firewire HD and I unchecked "enalbe disc use" anyway.#
Something is definitely not right somewhere - when I switch to manual management of tracks it works fine - its just a pain to do that all the time.
Cheers
Adam

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