Seems like that would be the way things would work, wouldn't it? Again, it's been many years since it happened. The precise details of what happened are a bit fuzzy at this point, as is often the case with very painful events in life. It may have merely "forgotten" where to find all the music and emptied the library. And, it may be that the actual file deletions happened on the iPod rather than the PC (I'm still pretty sure it deleted files on the PC, though). I remember being furious and confused by the behavior of the software...and I remember having to re-rip several albums that I hadn't backed up lately, and I lost a few mixtapes that someone had made for me.
That reminds me of another thing I hated about iTunes...it was always re-indexing its library. All the damned time. Every time I would start it, it would go galloping all over my PC (this was back in the days when I had three or four hard disks, plus a file server) for like 30 minutes.
Regardless of the specifics, iTunes made an enemy for life out of me by being so damned confusing, and so hostile to my existing workflow. I'd been using digital music for a decade before iTunes came along, and iTunes just did not fit into how I'd been using it.