I also have the same problem with my icelink. My ipod is a 30gb photo with the latest update.
When my icelink goes down, the ipod continues to play on its own with no interaction between the radio controls. It will not FF or REW or skip or swith playlists and the radio display reads *AUX*.

I have found that I must pull the fuse on the icelink to resett it and then all works well. It happens to me maybe once every couple days. Recently, it has been working well for the last 4 days.
Does anyone have a link for the icelink update?