This baffled me for a while, so thought I'd share my workaround.
I have a iPod Nano (Fourth generation) which plays music with no problems via the factory fitted dock in the armrest of my GTI. What it won't do as standard is charge the iPod, so you'll find it behaves a bit erratically as the charge runs out.
The issue is that the Golf dock provides power via a FireWire connection. The newer iPods (such as the Nano) require power to be supplied via USB. you can workaround this by plugging a simple converter in between the dock and the iPod.
There are plenty of these around, the most popular being from Griffin. However, I thought the Griffin item looked a bit large and the armrest probably wouldn't shut. After some hunting around, I found a smaller sized converter here:
http://www.carputer-shop.co.uk/accessories-c-6/iphone-ipod-charge-converter-p-11The website isn't great, but I had no issues using these guys. My Nano now works as expected.
Hope this helps someone, it confused me for a while!
Cheers,
Chris