The Apple iPhone has been increasing its popularity as a multipurpose device, acting as both a mobile phone and a small handheld computer. There have been a lot of rumors about a smaller, cheaper iPhone that was dubbed the iPhone Nano, but apparently these rumors are false as Apple is not pursuing plans to release a smaller iPhone model in the future. Instead it will most likely drop prices on previous generation models, like the 32 gig Apple iPhone 3G.
Apple has several reasons for not wanting to release the smaller iPhone. First, they are concerned that it would cause fragmentation in the iOS ecosystem, and force developers to support another screen size and resolution. Also, the smaller size would make it more difficult to operate and it would be unlikely to pass Apple's obsessive quality standards. Furthermore, having too many models can lead to consumer confusion and thus dilute the power of the brand.