If all of your music is going to be in mp3 format then either the 16gb nano or to give you future options the 80gb classic are both within budget.
You do need a headphone amp as all headphones in my experience work better with an amp.
The FiiO E5 is here...
...at under £20 and it is smaller than the ipod. People use rubber bands to hold the two together. I clip mine through my ipods protective cover. It has a bass boost, which works better on sensitive headphones better than insensitive ones. Then you get a
LOD cable at less than £5 to connect the dock of the ipod to the amp....
Now you will get the best sound possible and you have sufficient power to drive
these cracking headphones from Goldring. They hardly leak any sound and even without noise isolation on keep you isolated from outside noise. They fold so have a carry case and they are not too big and they appear to be quite robust.
They are also very cheap at £50 off Play.com. Even if you go for different headphones the FiiO amp at 0.5 watts is enough to give everything I have far more clarity, soundstage, dynamic, the lot.
That lot comes to under £200 and since I have such a setup and have compared it to other more expensive head-fi, I can promise you that you will get great hifi sound. The only issue is if you are a bass head and like dance, rock etc. Then I would suggest different headphones.