The wiki that Mark pointed you to gives a good overview of gapless playback. Specific to your issue of gapless playback on an iPod, however, you will want to insure that you have the latest firmware release (it can be downloaded from Apple's website) for your iPod... Gapless support on iPod is a relatively new feature. You'll also want to upgrade to the latest version of iTunes (7.2 is the current release); versions from 7.0 and up support gapless playback. You can set albums for gapless playback from your iTunes library.
Does that gapless playback setting work for MP3s already ripped, or only those ripped after
you activate that setting? I ask, because with Sony's SonicStage/ATRAC system, you MUST do a complete rip of adjoining tracks to ensure gapless playback. Decide to re-rip one track without its adjoining track, and gapless playback can't happen. Also, the Sony system NEEDS the original CD - purchased tracks are NEVER gapless. I imagine something similar happens with the iPod/iTunes?
As for downloaded music, I use emusic almost exclusively. They are a great service for purchasing legal downloads at a great price and at higher quality than most of the competitors.
Heartily seconded. A totally problem-free, hassle-free download site.