You cannot "downgrade" or "upgrade" to 2.0.4 via the Settings menu if you have a corrupted OS. You must use DFU (Device Firmware Update) mode.
If the automatic method fails, you can manually download the firmware from The Apple Wiki . To install it, hold Shift (Windows) or Option (Mac) while clicking the "Restore" button in iTunes and select the downloaded file. Version & Compatibility Details Specification Primary Device iPod Classic 160GB (Late 2009) Model Numbers Typically MC293 (Silver) or MC297 (Black) File Format .ipsw (approx. 50MB-57MB) Key Distinction ipod classic firmware 2.0 4 download