If I had to choose, I would choose the iPod Touch only because I find it serviceable enough as an ereader and I cannot live without its other features (it replaced, for me, three other devices!) But with that said, I do really enjoy my Sony and read more on it now than I do on the iPod Touch. I also like that the Sony looks more like a book so it is less conspicuous to read around co-workers who assume an ipod is just for music and games.
For me, I do play games and listen to music/watch video on the ipod, so I would want it regardless of the ebook aspect. There are days I travel lightly and carry only that, there are also days I bring the Sony too. There are times where the Sony is a much better choice for me (e.g. at the gym, I can't read a tiny screen while moving) and loading content is easier on the Sony as you don't need an internet connection.
So I guess it comes down, for me, not so much to whether the iPod Touch is a good reader or not but its other functions. If I had to choose, I would privilege those other functions, but it does not mean it would be my preference for reading.