As I understand it, iPod support is limited, especially with NG4 (you don't mention which system you have).
I know from experience that, with NG4, you are better off using the in-built jukebox, an external hard drive with mp3 tracks only or - as you have found - a strictly mo3 player.
For the NG4 system, I'm given to understand the issue is a combination of design lead time and the various licence agreements etc. that have to be in place to make the two systems to talk to each other in a useful way.
For the standard radio, I think the iPod control is much better, with better navigation available, as well as streaming by bluetooth. I've never heard of some of the symptoms you report - skipping, slow response etc.
Perhaps others can comment?