32gb is £249, that's a little steep to spend on a child's Xmas or birthday present.

Why is there no 8gb or 16gb versions or are they to follow ?

Firstly, children do not need iPod Touches for Christmas (get them a Galaxy Player or some other device) and secondly, 8GB (which is really only 6GB) is of no use to anybody on an iPod device.

So why no 16gb then ?

To keep the price down for the kids! And don't bother taking CoolboyA's advice, the GS players are similarly priced to the touch, so he must dislike Apple it would seem.
The reality is though the 16GB is running on 2 year old tech now, so if you want something that will last and get updated, you need to consider the new ones unfortunately.

I notice how now one has actually answered the question! LOL

I expect Apple want to get a certain price for the iPod Touch and they won’t think there is enough demand for a 16GB version

Exactly.

A reverse of this is lack of high capacities in the Clip and the Clip Zip.
The 64GB SD card slot means people are mostly happy with the 4 or 8GB versions.