Though it’s a feature many never took advantage of, the first several generations of full-sized iPod—specifically those that supported FireWire syncing—were capable of booting a Macintosh. Just plug the iPod into your Mac’s FireWire port, run the OS X installer, select the iPod as the destination disk, and, if the iPod has enough space to allow, you can install a bootable system on the iPod.

When Apple abandoned FireWire syncing, the bootable iPod also disappeared.

Until now.

Apple’s Intel-based Macs can boot from compatible USB 2.0 hard drives. The 5G iPod happens to be just such a compatible USB 2.0 hard drive. It worked this way for me:

I plugged my 30GB 5G iPod into my new 1.66GHz Core Duo Mac mini. I inserted the mini’s Mac OS X Install Disc 1 and double-clicked on the Install Mac OS X and Bundled Software item. When I attempted to choose the iPod as the destination for the installation, I was presented with a large red X, indicating that the iPod was not a suitable target.

http://playlistmag.com/weblogs/ipodblog/2006/04/ipodbootreturn/index.php