I'm wondering, and I don't know about Shuffles but I have an 80 gb iPod and in iTunes have 'checked' all the tracks I want on it. In the past I have had to restore the settings, and iTunes would give the option of syncing all tracks etc, and when I have confirmed I got the same message as the first one above. When I let it continue it chose a random tracklist up to the iPod's capacity.
I have never had the second message appear, but I'm guessing that your music library exceeds the capacity of your Shuffle.