What causes the "Unable to download application" error on an iPod Touch?
I had this twice on my iPod touch.

When it happened first, there was not enough free memory on the iPod.

The second time it was an app (yxplayer) not designed for the iPod. I even could not install it after I had downloaded it in iTunes. If I remember correctly iTunes told me that this app can not be run on an iPod touch. After i "upgraded" my iPod to an iPhone 4, I could install the app without any problems.