ipod nano (3rd gen) not compatible???

Hello all, I'm posting this cause I'm at a loss and I'm hoping someone here might help.
 
I have a 07' CLK350 Cabriolet with the factory installed ipod integration kit (and command, gps, etc.)  It worked fine with a previous ipod (not a nano) but will not work with my new ipod nano (3rd generation).  I ensured the files were ACC (itunes) and even restored and updated all patches.  I even tested it with my daughter's ipod (not a nano) and hers worked fine.  All I get with the nano is a lot of bassy noise and other weird electronic sounds and clicks.
 
Is the nano 3rd gen different or imcompatible?
 
Thank you
Jim