Converting widescreen material for use on the iPod is fairly easy. The easiest method is to simply use the H.264 encoding preset, which applies widescreen automagically. If you want to use MPEG-4, choose custom, and convert with 320x180 as the target frame size. Then, make sure that the iPod Video Settings (/Video/Video Settings/Widescreen) is set to ON.

Your movies should then play in Widescreen (letterbox).