Updated with Amazon response and comments from Gartner analyst Allen Weiner.

SEATTLE ( TheStreet) -- Hot on the heels of Apple's ( AAPL) iPad launch and Google's ( GOOG) 'gPad' plans, Amazon ( AMZN) may be inching closer to a color and touchscreen version of its Kindle e-reader, if rumors of its acquisition of startup TouchCo are proved correct.

With the next generation of tablet computers doubling as e-readers, consumers will now be able to view books and magazines in color, something lacking on Amazon's popular Kindle.
Kindle

The Kindle also lacks touchscreen capabilities, a feature available on the latest color version of Barnes & Noble's ( BKS) Nook. Amazon, however, could be about to change that.

On Wednesday The New York Times reported that Amazon acquired New York-based Touchco, a company specializing in a touchscreen technology. Citing a person briefed on the deal, the newspaper said that Amazon will merge Touchco's technology and staff into its Kindle hardware division.

The Times reports that Touchco's technology uses resistors that have been designed to work well with full-color LCD screens.

Born out of New York University's Media Research Lab, Touchco's sensors are said to use less power than traditional touchscreen sensors and are also less expensive to produce, according to the company's LinkedIn profile.

"We don't comment on rumors and speculation," was Amazon's response to a request for comment on this story, and TheStreet was unable to reach Touchco. A note on the startup's Website says that as of January 2010, the company is no longer doing business, adding fuel to the rumor that it is now part of Amazon.

An acquisition of Touchco could leave a big question mark hanging over Amazon's future relationship with its current display partner, E-Ink.

At least one analyst feels that Amazon has its eye on much more than just the e-reader market, as evidenced by its recent decision to release a software developer kit for building Kindle applications.

"You're not going to come out with another device that will only read books," Allen Weiner, a research vice president at Gartner told TheStreet, explaining that Amazon is already the distribution point for movies and TV shows. " Amazon could bring out another device that would take advantage of new opportunities - that's clearly the vision."

In addition to a new all-singing, all-dancing Kindle for TV and movies, Weiner is keen to see what partnerships Amazon will forge to take on Apple.

"One would be a partnership with Adode ( ADBE); neither the iPad nor the iPhone support Flash," he said. "There could also be a situation where Google and Amazon work together because Google is looking for more places for the Android platform and the Chrome browser."

"This is the e-reading love triangle," he added.

Amazon keeps its Kindle sales numbers under wraps, but is said to have been enjoying strong demand for its e-reader. With analysts expecting e-reader sales of around 2.5 million by the end of 2010, The Washington Post reported that Amazon hit the 3 million mark in December, citing a source close to the company.

E-readers have become a much more common sight in the last year, and Forrester Research recently said that 900,000 of the devices would be sold over the holiday season. With Apple and Amazon expected to lead the e-reader race, the space is nonetheless becoming much more crowded.

Software giant Microsoft ( MSFT) is entering the fray with its Courier touchscreen device, and Sprint's ( S) forthcoming Skiff has also been grabbing plenty of attention.

Amazon shares dipped 6 cents, or 0.5%, to $118.5 on Thursday as the Nasdaq fell 1.55%.

-- Reported by James Rogers in New York

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