For a while, using IPODs to read MP3 e-books was a pain. the Ipod generally didn't save locations within a file, so unless you were listening to a book in one sitting, it wasn't a very convenient mechanism. There were audiobooks for IPOD (M4b extension) which worked well.
I used a freeware converter (see http://www.freeipodsoftware.com/) to convert individual MP3 files (often chapters) into a single M4b file, which was transferred to the Ipod. I did run into problems with very large Audiobooks (Einstein and Oppenheimer biographies were over 7 hours long) - these longer files would not keep track of location in the last 3rd of the file. I blamed this on the Ipod, however, some internet chats point toward the freeware conversion process.
When I picked up a 5th generation Ipod Nano (not the new square one, the last long one with the camera) and updated Itunes, I noticed that there are now options to set up any MP3 files as audiobooks (through the "get info" option for each file, choose the "options" tab, choose "Media Kind"=Audiobook, check the "Remember Playback position" and I click on the "skip when shuffling" box as well).
I also use another freeware product - Merge MP3 (see http://www.shchuka.com/software/mergemp3/). This allows me to either use the program and merge all individual parts/chapters of an audiobook into one large file, or I can choose to keep the individual chapters. In either case, choose the Audiobook settings as described above and all works great.