Rumours of a new, cheaper iPhone variant are not going away. The latest round comes from 9 to 5 Mac, and the site cites people in the know who claim that an all-new iPhone aimed at the mid-range market is indeed in the works.

There is still no word on what the “cheap” version will look like. Punters believe it could be loosely based on the iPod touch, which is not a bad thing. The current generation iPad touch is a rather sleek and compact device. It’s about 100g heavy and just 7.2mm thick, all packed in a curved case seen in previous 3G series iPhones and the first iPad.

The current iPhone 4 might appears to be too pricey to take on Android phones in the mid range market and if Apple is to compete it needs a cheaper device. The iPod touch would be a good start. It uses a somewhat cheaper screen and camera, but it’s still quite an appealing toy, especially if Apple can keep the price low.

However, the big issue has nothing to do with the phone itself, but rather Apple’s sale policies. It would make sense for Apple to offer the new toy in retail, allow carriers to bundle it with post paid packages and sell it in smaller, less developed markets without much hassle.

More here.