Spelling correction on iPod Touch
Take a look at Apple's iPod touch iOS4 User Guide. In particular, page 31 has two helpful tips:


To reject the suggested word, finish typing the word as you want it, then tap the “x” to dismiss the suggestion before typing anything else. Each time you reject a suggestion for the same word, iPod touch becomes more likely to accept your word.

Turn auto-correction and spell checking on or off: Choose General &gt; Keyboard, then turn Auto-Correction on or off. Auto-Correction is on by default.