I believe the idea of an iPhone Nano is just downright stupid. Seriously, how small is small? It already fits in your hand great! Besides, it'll over saturate their product line, cause tons of issues with developers and the new hardware, not to mention the app store, and quite frankly, it just doesn't make sense at all.
If $200 is still too much for the most advanced phone in the world from an A-List company, then you need to start looking for another RAZR. Apple is not known for "half-assing" their products, and they won't start with the supposed iphone nano. RIM's Blackberry doesn't need to bend their pricing, and neither should Apple.
I seriously hope all these rumors fade away and the idea is finally laid to rest. *sigh*