The device is said to resemble Apple's popular iPad device (due to launch in the US this Saturday, and in the UK late April) with a multi-touch enabled touchscreen (with a single home button), location services, and accelerometer to determine orientation.
Obviously, the key differentiating factor will be the size of the device, rumoured to much smaller than the iPad (perhaps even half the size).
Like the iPad, we imagine the iPad nano to sport other controls including volume and the home/lock button. Although its smaller stature may mean that some iPad accessories, like the keyboard dock and case may not be supported.
Unlike the iPad, rumours point to a smaller screen size, between three and four inches, enabling the device to be placed in the pocket (overcoming one of the key hurdles identified with the iPad). What impact this will have on the keyboard and display layout remains to be seen though - although the slightly spaced-out icons on the iPad display, plus the shortened 'Slide to unlock' control certainly hint that smaller screen sizes are a consideration for Apple.
Like the iPad the iPad nano could support Apps. App developer April Zuerst, from Germany-based Dummkopf Software told us: "A smaller iPad would certainly be a challenge for us developers; we'd have to completely reformat our iPad apps to fit on the smaller screen size." however, she hadn't heard anything from Apple regarding the iPad nano: "Apple doesn't tell us anything in advance, and [laughs] even if they did I wouldn't tell you because it'd break my developer agreement."
An Apple spokesman told us: "Apple does not comment on rumour or speculation."
Update: A second set of rumours indicates that like the iPad, the iPad nano will come in two different versions. One WiFi and one supporting 3G networks. The 3G network is also rumoured to support native voice calling functionality.
Editors note: Some eagle-eyed readers (well everyone apart from one person) may have spotted that this was 1 April and a joke on our part. Looks like we've got egg on our faces though as Apple is now reportedly, genuinely working on a smaller version of the iPad. Albiet one with a 5-7in screen. Click here for that story.
An artists impression of how the iPad nano might look