Ok Lets see the pros and cons.
Pros
iPod touch:Fast Internet,Multitouch,large amount of space(even 8GB),Variety of apps,Comes with headphones,Very Portable,Looks sexy and extremely scratch resistant screen,Music,Videos,Photos,Flash memory
PSP: HD screen,Internet,Visual player (something all iPods lack),fairly portable,Games(the iPod touch has game apps,but the PSPs UMD games are obviously better),Music ,Videos,Photos.
Cons
iPod touch:Back get scratched easily,Screen get fingerprints easily,Not enough space to store most large iTunes libraries,You have to pay money for Apps,Music,Videos, etc.... ,the very high price of the iPod itself($300-$400)
PSP: You must pay extra money for memory stick duo(the memory stick only holds 1-4 GB),lacks touchscreen,pretty large in size(even the slim and lite),breaks easily,you must pay quite a bit of money for games($20-$60),doesn't come with earphones,speaker is very crappy.
Overall I prefer the iPod touch, but ultimatley it depends on whether you like music more,or games more.
Ask yourself, do you want a portable video game player,or a portable media player.
Its your choice.Games or Music.