I'm a big fan of the iPhone nano rumor because it comes down to common sense and deduction.
Apple's m.o. the past decade has been: make an expensive product that everyone wants (iPod), then when sales taper off make a cheaper one (iPod nano), and when the market's almost saturated make an even cheaper one (iPod shuffle). There's no reason that Apple wouldn't follow its exact playbook with the iPhone. Why wouldn't they? It's a proven model that has catapulted Apple to being the largest music retailer with the highest selling media player.
The iPhone nano would fill the low-cost, entry-level slot in Apple's phone lineup quite nicely. I'm surprised that we didn't see a less-expensive iPhone announced at Macworld Expo this month but more signs point the fact that Apple will indeed release an iPhone nano some time this year.
The latest hint comes from DigiTimes (via the Chinese-language Economic Daily News) which reports that Taiwan Semiconductor Manufacturing Company (TSMC) and United Microelectronics Corporation (UMC) will likely land the chip orders for the iPhone nano. According to the the paper, the chip orders may come in March and the launch of the iPhone nano would occur no sooner than June 2009.