There are many reasons an iPod hard drive might fail.  Over time, hard drives just die on a user.  Every time you boot up a device, in this case your iPod, you are wearing and tearing on the hard drive that makes it possible to listen to music, watch videos and do more with the handheld unit.  Sometimes the hard drive just dies, other times some sort of physical jolt causes it to fail.  Eventually, the HD will fail and being prepared for that, especially when the device is outside of its warranty might help you decide if replacing the HD yourself is worth the trouble instead of investing in a new iPod.

You need to remove the iPod backing to start replacing the hard drive.  You want a tiny, computer-sized flathead screwdriver.  Simply pry the casing off gently all around the unit.  Once you have done this around the entire unit, you should be able to pull the casing apart until you see the insides.  From here, you want to locate a silver drive surrounded by a thin rubber casing.  This is the hard drive.  If you gently flip it over, you will have access to replacing it.  There will be cables, casing and other components inside, be careful not to touch anything other than the HD.  When you located a cable that looks like what is commonly known as a computer IDE ribbon, you want to remove it from the drive and remove the hard drive from the casing.

From here, you want to remove everything attached to the HD.  This should include a bit of rubber and a small felt cloth.  Depending on the model iPod, you may need a specific iPod-based HD.  The hard drive you pulled out will give you that information so you can purchase the right one and continue with the replacement.  When you purchase the new drive, simply reverse engineer what you have already done to the iPod.  Plug it into your computer via USB cable and let iTunes download the firmware updates you need to run it like new.

Replacing the iPod hard drive is not foolproof, as many things can go wrong while you are on the inside.  However, if you make the attempt and have nothing to lose, it is worth a shot if you think you can fix it.  Worst case scenario is purchasing a new iPod, and if your old one is a few generations behind, you are upgrading to the latest iPod which may be more beneficial for your music needs.