Will upgrading my iPod touch 3g erase any data or settings? My old iPod nano was completely erased, (losing some unrecoverable songs) when I last updated iPod firmware. Is there a way to upgrade my iPod touch 3g without losing all my data?
iTunes should back up the data before updating the firmware and restore it again afterwards (this is what it does with an iPhone)

To be absolutely sure you can right click on the iPod Touch in the tree and select Backup to create a manual one before updating.