Hi,
Sorry my bad, too many iPod device versions in my head.

What would your iPod say if you sync number of tracks directly to SDcard and then insert it into iPod?

There is no issue with the drive. I'm using a brand new and tested SD card. I restored it and it works fine again. It was the transfer that caused the iPod to get stuck in Diagnostic black and white mode.

Hi,
Boot loop can be caused by drive failure. Not sure, but many users report upgrading to an SSD fixes the problem and making their iPod works better than new.

Synced first 40,000 files fine using MM to my iPod Classic 7.5g. However when I synced the remaining 25,000 or so the iPod was forced into the black and white diagnostic mode and would boot loop with Apple logo when trying to start it.