Apple plans to launch a cheaper version of the iPhone in the fourth quarter that could be based on the ultra-slim iPod Nano music player, according to a JP Morgan report. Kevin Chang, a JP Morgan analyst based in Taiwan, cited people in the supply channel he did not name and an application with the U.S Patent and Trademark office for his report dated July 8.

Apple filed a patent application document dated July 5 that refers to a multifunctional handheld device with a circular touch pad control, similar to the Nano's scroll wheel.

Sales in the first weekend of the iPhone aavailability were as high as 700,000 units, according to estimations.

Chang said a way to follow up the iPhone with a cheaper version would be to convert the Nano into a phone and price it at $300 or lower. The iPhone sells for $500 and $600, depending on storage space.

Another analyst Gene Munster of Piper Jaffray said he expects Apple to bring out iPods that resemble iPhone, which features such as a touch-sensitive screen, later this year.

Sales of the iPhone are expected to be limited to a small percentage of the market due to its high price tag, particularly in the United States where 85 percent of consumers tend to spend $100 or less on cell phones.

But analysts forecast that a cheaper phone from Apple, which leads the digital music player market, could pose a much bigger threat to long-established phone makers such as Nokia , Motorola, Samsung and Sony Ericsson.

Taiwan's Catcher Technology will be the "major source of metal casing" for the new phone, according to Chang, who cited an unidentified channel source.