Instructions
Connect your iPod Nano to your PC.
Open Apple's iTunes.
Click your iPod Nano's name.
Select "Enable Disk Use." Click the "Apply" option in the same window. This enables your iPod Nano to be used as a USB flash drive on your computer or on similar devices like your Xbox 360.
Disconnect your iPod Nano from your computer. Plug your iPod Nano's charging cable into a USB port on the Xbox 360, and plug the iPod Nano into the USB charging cable. The iPod Nano can now be used as a flash drive by the Xbox 360.