Nano-Apple is planning to launch a cheaper iPhone based on the iPod nano towards the end of the year, according to a JP Morgan report.

Kevin Chang, an analyst with the firm in Taiwan, has based his prediction on information from ‘unnamed sources’ in the supply channel and a new patent application made by Apple in the US.

Apple filed a patent last week for a multi-functional handheld device with a circular control wheel like that found on the nano. Chang claimed the new iPhone will cost around $300 (£150), making it around half the price of the current iPhone, which has been selling very strongly since its launch a couple of weeks ago. It’s predicted to launch in Q4, around the time the UK gets the first iPhone.

“We believe that iPod nano will be converted into a phone because it's probably the only way for Apple to launch a lower end phone without severely cannibalising iPod nano," Chang said.

The new phone is expected to have a lot less functionality but will put Apple in a position to challenge the major phone makers in the mainstream mobile market. Apple has declined to comment.