It would appear that upgrading Apps on the iPhone (and in my case the iPod touch) is not as simple and straightforward as Apple would lead you to believe.
Over the internet tubes there are quite a few reports about using the in-built App store on the device itself to update doesn’t always work as expected.
Personally I have had a similar issue myself when upgrading the iDrops game on my iPod so much so I had to follow the advice given on the iDrops website.
Following the release of v1.2 of iDrops, a lot of users have reported problems with Apple’s less-than-ideal application update process in iTunes.
To help with the upgrade process, we would recommend trying to uninstall iDrops, and then installing it again (this is easy to do).
You can do this in iTunes if you manage your installed applications manually. Uncheck the iDrops application, and sync with your iPod or iPhone. iDrops will be removed from your device. Check the iDrops application again, and sync with the device again. iDrops will be re-installed. It should now launch with no problems.
So though it is possible to add and update apps on the fly, starting to look like you should avoid doing it on the iPod and if you can add and remove Apps on the computer and then sync to your iPod touch or iPhone.