Do you have DHCP serving the proper DNS search suffix?
Option 015: DNS Domain Name
Also, it wouldn't hurt to have the DHCP option 252 setup to point to the URI of the PAC file explicitly.
I can't attest to how an iPod will behave, but my iPad with the latest iOS does honor the DNS and the DHCP options.
The production environment is hetrogenerous, so I wasn't pursuing DHCP option 252 due to this thread: http://forums.macrumors.com/showthread.php?t=991781
I'll have a fiddle with option 015, thanks for the lead
Do you mind if I ask what A and CNAME records do you have in DNS?
I have multiple A records for wpad.domain.local pointing to multiple proxies to do a simple round robin amongst them.
That forum thread you pointed out was true many years ago, but has long since been fixed on current OSX and iOS.
I tested this in depth about a year ago to validate that DNS and DHCP both worked at the time.