Well now I am forced to come to the conclusion that it is indeed a hardware problem. I was tipped off at first when you said that the iPod said "No match found" because that has to do with the Voice Commands (hold the home button and speak a command). And since you say that the sound still fully works, then I will have to say that the display is faulty. You can go to the Apple Store and tell them it's been like that since, day one, they will most likely give you another on the spot.
I am curious though. If you would, try something for me? Press a button, as if you are going to unlock the iPod normally, and drag your finger across the bottom as if you are dragging the slider.
The reason I ask is becasue the way that the iPod Touch and iPhone are made the digitizer (the actual touch part) and the LCD are separate pieces. So even if the display is busted, it doesn't necessarily mean that the digitizer is. It would just be fun to know, that's all
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