I've on occassion used my MP3 player (don't have an ipod) when cycling, largely when touring. I have "sports" earbuds with a little rubber wing that holds them in your ear but just out of it, so ambient sound gets in quite well. I always keep it on low anyway, lower than I would have if I was sitting at my desk at work, but it's nice when you've got a long, monotonous bit of journey, and not much to keep your brain occupied to have something to hum along to. It helps to have a well-developed paranoia that results in checking over your shoulder every few minutes.
Riding with an ipod up so loud that you can't hear the train that's about to kill you, or people's warning shouts, that's dangerous. But the ipod itself can (and should) be used in a way that isn't.
I cringe a bit when I see people with trendy "cans" headphones on, that completely cover the ear and have a nice foam-rubber cushion that conforms to the side of the head and helps further to keep ambient sound out, although I guess if they aren't up too low it's no worse than earmuffs.
Sometimes it's the cables hanging freely and swaying around ever so close to moving parts that makes me suck in my breath.
Having seen the amount of computer gadgetry now installed in car dashboards, I think this is a far more worth Darwin device than an ipod. There's a mind-boggling array of car performance, environment and entertainment electronics packed in to the modern car, all synchronising with ipods and iphones. And by the looks of it, frustratingly difficult to master.
I like my old Sony MP3 player and rate it far above an ipod for functionality as it has a positive-feedback tacticle user interface (buttons!) Meaning that you can change volume, tracks, albums, fast forward, etc. without having to look at the thing or even take it out your pocket.