Covering iPod use can take an entire forum unto itself, but I'll give it a crack...
How much music do you have? If it's not much, then any iPod will do (with the exception of the iPod Shuffle), and the iPod Nano (
http://www.apple.com/ipodnano/) might be the best option. They are small and hold tons of music. If you have more than a few tons of music, then you might want to invest in the iPod Classic (
http://www.apple.com/ipodclassic/). These things are bigger than the Nano, but are still reasonably sized, and they hold many, many tons of music.
If you want more features but less capacity than the iPod Classic, look at the iPod Touch (
http://www.apple.com/ipodtouch/). But let me warn you that while they are great devices, they won't hold as many tons of music because they are also mini computers, capable of running applications, games, movies, etc. Basically, the iPod Touch (and please, please do not call it the iTouch) is an iPhone minus the phone bits.
Here is a chart comparing all iPod devices:
http://www.apple.com/ipod/compare-ipod-models/
But to be fair, I believe you can actually insert a USB key into the USB port of the car and play music off the key. You just don't get a whole heck of a lot of control that way, at least as I understand it. I don't bother with a USB key since I have the iPhone.