Apple could be developing a budget iPhone in order to ward off competition from Google Android handsets.

A prototype version of a smaller, cheaper Apple handset than the iPhone 4 is said to exist, although this is no guarantee such an iPhone will ever make it to market.

The mysterious little iPhone is apparently a third smaller than the iPhone 4, with no home button on the front of the handset, which certainly sits well with rumours that Apple is aiming to do away with the button on all iOS devices.

iPhone nano

The person who claims to have seen the prototype device says that Apple has considered selling it at around $200 (about £130); you can currently get an iPhone 4 for around that price, but you'll be locked in to an expensive two-year contract for your trouble.

Another price cutting measure is to take advantage of drops in component pricing. The new budget iPhone could use parts currently used in the iPhone 4 – processor, display etc. – leaving new, pricier elements to the as-yet unannounced 'big' iPhone 5.

Apple for the people

The reasoning behind Apple's potential downmarket move is to widen the handset's appeal and combat the effects of Android, which currently offers a huge range of price points.

A lower-cost iPhone could also see Apple get a foothold in the huge Chinese and Indian markets where price is a real factor.

Although very few people in the company know of the project, Bloomberg's source says that Apple was aiming to reveal the budget iPhone in the summer.

Could this mean two new iPhones this year? Be still our beating hearts.

Via Bloomberg