Reports suggest that the smaller iPhone will sell at around half the price of the current models, and will have a similar form factor to the Nano with a scroll wheel for navigation and dialling.
"We believe that the iPod Nano will be converted into a phone because it is probably the only way for Apple to launch a lower-end phone without severely cannibalising the iPod Nano," Kevin Chang, a JP Morgan analyst based in Taiwan, told the Sydney Morning Herald.
Chang cited rumours from Taiwanese hardware suppliers, which provide most of the parts for Apple's hardware, and an application with the US Patent and Trademark Office on 5 July for a "multifunctional handheld device with a circular touch pad control".
The analyst predicted that the device would cost around half that of the current iPhone models, which retail at $499 and $599, and that this would dramatically increase sales.
Sales of 10 million units are predicted for the current iPhone range by the end of next year, but Chang predicted sales of 30 to 40 million for the smaller device.
Gene Munster, an analyst at Piper Jaffray, largely agrees with Chang. "We believe that the iPhone reveals much of what the iPod will soon be," he said.
"IPods with some of the touch-screen features of the iPhone should lessen the impact of cannibalisation."
PUBG news and updates: November's Update #23 to bring new Skorpion pistol and changes to blue zone visibility
Genuinely useful side-arm coming to PUBG in Update #23
Asda, Morrisons and Tesco in the frame for checkout facial recognition technology
Research opens up new possibilities for structural batteries, where the carbon fibre forms part of the energy system
Another shape could have indicated hard-to-detect particles