The new model would retail alongside the forthcoming iPhone 5, for around $200 (?125), Bloomberg said, citing people who had been briefed on the plans. Apple was working to awards a mid-year release date, one said, but the schedule may have changed or been scrapped.

A prototype seen by the same source last year was two-thirds the previous iPhones and had no "home" button.

Apple plans to make cost savings by resusing components, including the processor, from the iPhone 4, which are now cheaper than when it was first released last June. The iPhone 5 is expected to incorporate an new, faster, more expensive processor.

There has been speculation that Apple would release an "iPhone Nano" for years, but today's report is the most solid yet. The strategy would be a repeat of how it developed smaller, cheaper versions of the iPod as other manufacturers entered the market.

It is currently facing a strong challenge from Google Android devices in the smartphone market. They are typically cheaper, and have already eclipsed Apple in terms of market share.

Interestingly, the ?125 price tag quoted by Bloomberg includes no contract or operator subsidy. Even with a 2-year contract, a subsidised iPhone 4 costs around ?230. Apple is already known to be working on a technology called "universal SIM", which would allow users to pick a network without swapping the SIM card.

The timing of these latest Apple rumours has raised eyebrows among industry watchers. Today Microsoft and Nokia are announcing a tie-up between Windows Phone 7 and Nokia smartphones in a bid to take on both Apple and Google.

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lig}{tning Reviewed by lig}{tning on . Apple 'preparing ?125 iPhone Nano' The new model would retail alongside the forthcoming iPhone 5, for around $200 (?125), Bloomberg said, citing people who had been briefed on the plans. Apple was working to awards a mid-year release date, one said, but the schedule may have changed or been scrapped. A prototype seen by the same source last year was two-thirds the previous iPhones and had no "home" button. Apple plans to make cost savings by resusing components, including the processor, from the iPhone 4, which are now Rating: 5