If you do the math, saving $100 is cheaper; and you're still going to pay for the 2-year agreement regardless of the phone, the carrier or the plan; duh...

AT&T
requires a $30/month data plan to buy an iPhone. The iPhone nano, as described/predicted, would not have the same requirement. So yes, you're still paying for a two year commitment. The difference is, that commitment is $30/month cheaper than the commitment on the 3G. That's $720 + taxes over the length of the contract, and that's a substantial amount of money.
The math is not open to debate. You'd have to be incredibly daft to believe that ($40 x 24) = ($70 x 24)...
Same finger size. Smaller GUI elements. Worse user experience.
Or they could just skip the problem entirely by reducing the display size only a bit (if at all), not using iPhone OS, or not making an iPhone nano.
That's why I don't pretend to be an engineer for Apple. The point is twofold:
1) If anyone can find a clever, innovative way to control a device, it's Apple. The mouse. The click wheel. Multi-touch. Apple is very, very good at making devices easy to use. Why would they suddenly find themselves unable to make an iPhone nano work?

2) The second part of your defence seems to be "it's hard". And you're right, it would be easier to simply not produce this product. But let's take your logic one step further: by the exact same consideration, it would be easier still not to produce any products. Do you think Apple is going to stop producing products because it's easier? Of course not. What a silly argument.
Holy crap. Ten minutes into 2009 (for me) and someone makes the same genius point I try to make every day. Hallelujah! I thought I was the only one who thought the iPhone 3G is about as "pro" as Apple would go with a phone.
I agree entirely. I'm just floored when I see people argue that there's "no market" for an iPhone nano, and then turn around and say that Apple will release an "iPhone Pro". What a load or rubbish.
I do firmly believe than an "iPhone Pro", as described by some sources, is coming. But it will not be labelled a "Pro" - it will simply be the natural progression of the iPhone. Just like there was always "iPod"* and then the "lesser" models, there will be "iPhone" and then the lesser models. The iPhone Pro will exist, but it will be an evolution of the iPhone 3G, not a new model on top of the 3G.
* - true, this has changed with the introduction of the touch. But I expect that eventually the iPod classic will disapear, and eventually we will see the iPod touch and iPod touch nano, and be in the same place we were prior to the touch.
The problem is the number of threads on this bull**** rumor. There are so many other threads already on the iPhone Nano; I am tired of seeing new ones.
I'm a fan of the concept, but I agree that the number of threads is out of hand. All of this discussion could easily be condensed into one thread. But:
1) This is bound to happen with any big rumour. If there is enough attention, it will always generate multiple threads.
2) It's really not that hard to not click on a thread...