Reports from the US suggest that Apple are developing a smaller, cheaper version of the the iPhone to counter the challenge from Android devices. It is thought the new model would retail alongside the forthcoming iPhone 5, for around $200(£125).
The new phone could be ready for launch this summer, though Apple have yet to confirm full details. The firm plans to make cost savings by re-using components, including iPhone 4 processors which are now cheaper than when they were released last June.
The iPhone 5, which is expected to be unveiled in June or July this year, is set to incorporate an new, faster, more expensive processor.
The 'iPhone Nano' has been speculated for years and its strategy is likely to mirror the iPod, with smaller, cheaper versions being sold to counter other manufacturers. The Google-powered Android devices have already eclipsed Apple in terms of market share.