My 2G iPhone was in recovery mode and I option-clicked "restore" and selected the custom firmware bundle. The .ipsw file was unzipped, but almost immediately iTunes declared a 1600 error.

What can I do?

The PwnageTool instructions are ambiguous when they instruct the user to put an already-unlocked phone in recovery mode, since I understood this to mean DFU mode, which resulted in the 1600 error. But it sufficed to option-click restore and select the custom firmware bundle for the update to proceed successfully.

I had the same 16xx errors no matter what I tried. Just restore to official 3.0 on iTunes 8.2 then run redsn0w.

I got a 1604 error when trying to restore and I believe this was because I was not in the correct DFU mode. You need to go into a mode that is a blank screen. Not the USB cable with iTunes logo.

Once you get that right, it's smooth sailing.

After 6 hours of trial and error, using 2 different macs with my 16 gig 2G getting 1600, 1601,1604 errors all the time, recreating the custom firmware twice, redownloading all twice, reinstalling itunes, finally I followed Hamproof's comment and downloaded redsn0w. Worked in the first attempt! what a relief...

Thing is most replies I've gotten with my issue is just do DFU, try different PC, different USB ports, re-install iTunes etc. I've done all that and nothing works.

Am glad someone is in the same boat as me.

I spent 8 hrs one night trying to get it to work and finally gave up. Previously, I was able to keep trying until one of the fw works, usually 2.0.2. And at times when it works, I keep getting the apple logo only and phone reboots or vibrates. Tried the trick of restarting 3 times in 15 mins, tried QuickPwnRC3 and pulling out the USB when in white screen etc. DOES NOT WORK!

Finally with redsn0w, iTunes 8.2, FW3.0 it worked. Hopefully it'll be like this going forward.

I had the same problem but redsnow can to my rescue!!!!!
So if you have any 1600 related errors using pwnage please use redsnow it will save you a lot of time.

Thank you hamproof. I tried many things before I found your suggestion which kept me for being up all night fixing my wife's phone.
Cheers!