Are you sure? When you first enter the app and play your library, it 'appears' that it works, because you see a progress bar moving, but you will notice that there is no sound and no album artwork is being displayed and as soon as you press the forward skip track button, it crashes back to the home screen.
I just saw another complaint of this on the iTouch forum concerning Last FM crashing with 2.1 on the Touch.
You're right. It doesn't work. I thought it was but I must have clicked the button on the earphones to start my music up.
That's disappointing.