Rumored: iPhone nano in the Works for Christmas

Boy this must be the rumors of all rumors I've heard all year. People say that an iPhone nano is being conceived by Apple and it's planned to be released by Christmas. The people that are saying it are Daily Mail writers. According to them a $300 pay-as-you-go iPhone nano will be available for O2 customers by Christmas.

Why would I, as a simple consumer, choose to buy a smaller iPhone? Sure a nano version would definitely be so cool, but I would be losing a large part of that touchscreen. That means watching videos and web browsing are going to really suck on a nano iPhone. Oh and is it going to be a 3G iPhone nano?

I wonder where this rumor will lead... There are almost 5 months to Christmas.