CEO Steve Jobs indicated that the price cut is a deliberate move to make the iPhone as much of a mass-market item as the iPod.

"It changes the game for all smartphone makers," said Tim Bajarin, head of Creative Strategies, a technology consultancy.

The new iPhone also signals a new relationship between Apple and the mobile networks.

Previously Apple demanded a slice of the monthly revenue from each iPhone -- but that money will now be used by the networks to subsidise the price of the new iPhone.

"The vast majority of agreements we have reached do not have those follow-on payments, so you can conclude that the vast majority of carriers do provide subsidies for the phone," said Tim Cook, Apple's chief operating officer,

The change in business model will hurt AT&T, the exclusive carrier for the iPhone in the US -- the company expects a significant drop in revenue.

But analysts believe that in spite of the lower price and loss of call revenues, Apple will come out on top.

"It is still a very profitable business," said Shaw Wu, an analyst with American Technology Research.

"Now the negative is they announced the elimination of some of the monthly fees."

"But I can't really imagine the economics really being too much different."

"These lower price points seem somewhat designed to cope with the economy, the softer environment."

"They definitely make this product more resilient."

As well as support for faster mobile broadband over 3G networks, the new iPhone also boasts GPS and tools to allow easy access to corporate networks -- making iPhone a serious competitor to devices such as the Blackberry, manufactured by RIM.

"This positions Apple well vis a vis other smartphone competitors such as Nokia and RIM," said Shannon Cross of Cross Research.

"iPhone is no longer an expensive device."

"It's now priced at the mass market."