Isn't the good old 'nice' command intended for scheduling priority adjustments like these? Can someone explain why the 'nice' command is not suitable?

It's not too difficult. Here are the basic steps:

1. modprobe pktcdvd and use "pktsetup" from the udftools package to create a packet device.
2. Use "isoinfo" from the cdrtools package to find out the number of sectors (2048 bytes) used by the iso fs.
3. Use "losetup" to create a loopback device on top of the packet device from step 1 with the offset from step 2.
4. It may be necessary zero out the loopback device with "dd" in order to avoid IO errors.
5. Create a filesystem of your choice on the loopback device and mount it (I used "mkudffs" from the udftools package).

If Knoppix includes the mentioned tools then you should be able to do it after consulting a few man pages...

Combine this feature with unionfs (included with the latest Knoppix) and there are many possibilities..