And then again, new iphone cases will be sold to compensate any ergonomic inconveniences. Remember both Nokia and Sony-Ericsson are famous for making tiny little phones. I had two Sony-Ericsson phones long time ago, so tiny, fit in a shirt pocket, but a pain to use, would kiss the floor very often, good thing I had carpet back then.
But this would be a smaller iPhone with the same display size, if the rumor is true. It may just be slightly smaller that the iPhone 4, maybe about 1/4" inch less in length and width. That's not going to affect its handling that much.