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Sources in Apple’s Taiwan-based manufacturers say the tech giant may be thinking of downsizing the iPad’s 9.7-inch screen size.

According to Taiwanese blog Digitimes, which gets frequent (and often accurate) reports from many gadget component manufacturers, Apple may be preparing to launch a 7.85-inch iPad as soon as 2012.

These sources say the launch wouldn’t happen until late in the year. The smaller screen size is reportedly being considered due to the wild success of tablet/e-reader hybrids such as the Kindle Fire, Nook Tablet and Kobo Vox.

The 7.85-inch display panels that Digitimes says Apple is considering will be coming from a few companies, including LG Display and AU Optronics. Production could start as soon as the end of the second quarter of 2012.

We speculate that if Apple did launch a smaller iPad, the pricetag would likely be smaller as well, if only to compete with Nook and Kindle products in the $250 to $200 range.

Currently, Amazon is selling Kindles at the phenomenal rate of one million units per week, making the Kindle Fire the number two tablet behind the iPad in terms of sales. The Kindle Fire retails for $200.

Barnes & Noble’s Nook Tablet was released about four weeks ago; sales data is as yet unavailable. The tablet sells for $249. The company also sells the Nook Color, a slightly less flashy offering, for $199.

All three of these low-dollar competitors are, like the iPad, color touchscreens that can access web browsers, email, apps and video content. The one department where they’re lacking still is high-performance graphics. Still, for the non-gaming consumer, excellent graphics quality might not be such a hot selling point.

We’ll have to wait and see if Apple is seeing Kindle and Nook sales through green-colored glasses. But we’ve seen the company aiming for the mass market with smaller, cheaper versions of its hardware before (iPod nano, anyone?), so we wouldn’t be shocked to see it launch a smaller iPad eventually.

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