I am currently developing an interface for iPhone that mimics the iPod Classic, click wheel and all. I know that Apple will not accept this for the App Store as they explicitly say so, but I was looking through their copyrights and such and was wondering if there is anything stopping me from distributing it in some other way such as Cydia for jailbroken users. Would this be a legal thing to do?
It's completely legal to distribute apps through Cydia - Jailbreaking was ruled legal in the US a couple of years ago.
It does violate the warranty on the phone however, so relatively few iPhone owners do it, and if you are hoping to sell your app, be warned that Jailbroken iPhones have no copy protection, so a lot of Jailbreakers pirate their software.
If you don't mind targeting a very tiny market with a disproportionate percentage of pirated-to-legimate apps, then go for it!
In terms of the legality of copying the iPod interface, Apple have been trying and failing to sue device manufacturers for copying their designs for years, so I would't worry too much. I'd avoid using the word "iPod" anywhere in your design though as that's a trademark and will be much better protected by law.