iPhone based on iPod Nano due by year end?

Reuters is reporting on a a JP Morgan report that claims Apple will launch a cheaper version of the iPhone in the fourth quarter based on the ultra-slim iPod Nano music player.

Kevin Chang, a JP Morgan analyst based in Taiwan, cited people in the supply channel that he did not name and an application with the U.S. Patent and Trademark office for his report.

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

“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 cannibalizing iPod Nano,” he said noting that the new phone could have “rather limited functionality.”