I have a folder with 8GB of trance music alone, I must have at least 12 GB of music in total. These days most people have a lot of music. So the PSP can not store a lot of music, but it is a great multifunctional device. I have a friend who uses his PSP to just listen to music because he got bored of his games, he often complains how large it is for only music. And another thing you must consider is the battey life, ipod is a music only device it will work much more efficiently to play your music then the PSP, the psp has a large display and powerful CPU which is not required for music.
If you are mostly going to be using it for music, then ipod is a better choice. But if you are planning to play games on it just as much then you may consider the PSP.