Apple Inc is working on a smaller and less expensive version of the iPhone, Bloomberg reported on Thursday, citing sources.

The Apple Inc. logo is seen in the lobby of New York City's flagship Apple store January 18, 2011. [Photo/Chinadaily.com.cn via Agencies]

The prototype device is about one-third smaller than the iPhone 4, the report said, citing a person who had seen it.

Apple has considered selling the new iPhone for $200 without a two-year wireless contract, Bloomberg reported.

Apple is aiming to unveil the device around the middle of this year, but the launch may be delayed or canceled altogether, the report said.

Apple did not respond to a request for comment.

The company often develops products it never brings to market.

According to the report, Apple is also working on a dual-mode phone that would be able to work with the world's two main wireless standards.

AT&T, which carries the iPhone on its wireless network in the United States, declined to comment. Verizon Wireless, which also carries the device, could not be reached for comment.

Shares of Cupertino, California-based Apple closed down 1 percent at $354.54 on the Nasdaq on Thursday.