I have and love both of them. The ipod touch is a little easier to carry around in your pocket/purse and it solves the backlighting issue for me. However, I still absolutely love my kindle and usually use it during the day and use the ipod for reading in bed at night without disturbing my DH. If you have to choose only one then the ipod may be a better bet for you since it pretty much accomplishes the same things as the kindle, but remember the screen is a lot smaller harder on the eyes when reading for long periods of time and the battery runs out a lot quicker. Hope this helps.
I have the kindle on my iphone and love it - I wanted the kindle but didn't want to spend the money so was so excited they released it on the iphone! I'm still reading a lot of paper books as well but it's nice. I say, if you don't want to spend the $$$ just get it on your ipod or iphone!
I have both and love them for different reasons. I love reading off the kindle, the screen is large enough and so easy to read that I use the kindle when I'm home reading. Then when I'm out during the day and have a break I use my iphone to continue reading. That's the best part, they'll talk to each other and it will actually update you to the page you were on from the other device!
But it misses the point. I have a Kindle and a touch - you can read the Kindle for a lot, lot longer - the screen is designed for easy reading, not colour/video/quick graphics like a phone/iTouch etc. screen.