Battery loses charge when plugged in! Why?!

I've picked up an iPod touch from a family member, after he dropped it in a pool.

When you plug it in (to either a charger or a USB), the battery zooms down to zero, before shutting its-self off. If you unplug it, then the battery starts to ramp up again and stays at 100%. When it does run out of battery, the battery is still showing at 100%, but the unit crashes. Its then a question of giving it short, sharp bursts until theres sufficient power.

Aside from that, it works like a charm, can sync with iTunes (before the battery drains) and the touch screen is pristine! The battery seems to hold a good charge when it's unplugged too.

I've reinstalled the 2.1.2 firmware through iTunes, and recently installed 3.2.2 to the unit, but its not made any difference. Short circuit? Logic board? Battery?

HELP!