Apple has released iPod Reset Utility 1.0.2 for Mac which is used to restore the following iPod models back to their factory settings, when iTunes is unable to do so:

• iPod shuffle (1st Generation)
• iPod shuffle (2nd Generation)

The restore process completely erases all music and data on your iPod, and installs current iPod software on it.

More info and download links:
• iPod Reset Utility 1.0.2 for Mac (3.46MB)
• iPod Reset Utility 1.0.2 for Windows (2.2MB)