Well that problem can be solved with good interface design but most developers will probably struggle getting there, just like the Nintendo DS. In the first generation of iPod Touch games we can expect developers to try anything and everything to control games without a D-pad and buttons but by the second and third generation the better ones will have nailed it.
There is also the possibility that accessories will make iPod Touch games modular. Things like paddles, D-Pads, rumble packs, etc. are possible with the Dock connector.
Last but not least, is there anything stopping developers from utilising AV cables connected to the device for games on the television, like the slim PSP does? Such an option would solve the problem of fingers obscuring the on-screen action.
