You should never have less than 4.2 GB of free space on a 28 GB hard drive. There is a long technical explanation of why if you are interested, but you do need to fee up more disk space. Some more conservative users would say you should keep at least 5.6 GB (20%) free to allow for all the OS X invisible files, swapfiles, etc.
A lot of people use their iPod as a backup drive and to transport files from one system to another and have no problems. Personally that would make me a bit nervous. Your iPod is subject to rougher use than any HD, internal or external, and over the years I have had to "reset" my G1 iPod several times which results in loss of all data on the drive. On the other hand, my rather ancient firewire drive has soldiered on running 24x7 for years without a glitch. This is not a criticism of the iPod, I love my G1 and wish I could justify a new 40 GB mode or even a mini like my wife's.
iMac 3.06 GHz core 2 Duo OS X 10.5.8
MacBook Air OS X 10.5.8
MacMini core 2 duo OS X 10.5.8