There are two ways to tell if your iTouch recognized as a digital camera: The first is that a pop up in the lower right hand corner of your screen says so or it is listed in the Device Manager as one.  Normally, the most common way to tell is with that pop up.  However, if you open iTunes and your iTouch does not pop you, you might want to check out the Device Manager to see where it is showing up.

The primary way to fix your iTouch recognized as a digital camera is to update the driver associated with it. The reason your iTouch is recognized as a camera in the first place is because the driver somehow is corrupted. This can occur when you update iTunes, when you update the iTouch firmware or if the registry entries get fouled up. Go to your Device Manager, access it by right clicking on My Computer and then Manage and finally the Device Manager.

Once there, look under digital cameras for your iTouch. Since the iTouch recognized as a digital camera, that is where it will now be. Click on the device and go to Update Driver. Click on Browse My Computer for Driver Software and enter Program Files\Common Files\Apple\Mobile Device Support\Drivers as the location. Let the driver update take place, it may take a few minutes. Finally, unplug your iTouch wait for about a minute and then plug it back in. This should take care of the conflict.

If your iTouch recognized as a digital camera is still happening, there may something else going on with your system.  Call Apple support or visit their support forums online.  Other users may experience the same issue and when the drivers are not fixed, they will be able to provide other solutions for fixing the problem.  It may take some trial and error, but the problem can be corrected eventually.