iTouch?
iPhone Nano? I don't see why Apple would do it. In the US at least there's no shortage of potential customers begging for a full-priced version of the iPhone. If they were to finally release an unlocked version, something that probably won't happen until the clones start appearing, they wouldn't be able to keep up with demand.
But a cheap, small version? Why? I can't see why anyone would be interested, they are far more likely to grab an iPhone clone than a phone with a screen you can barely see.
On the other hand if they were to release an iTouch Nano it would continue to move their entire product line towards the same technology. The only device that doesn't make sense to go this way is the large capacity classic iPod, but that's only a matter of time.
The current iTouch is almost identical to the iPhone in every way except voice communications. Protective jackets double for both devices. My guess is the real device this protective jacket has been made for is the next iPod, not the next iPhone.