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NEW YORK, (

TheStreet

) -- The prospects of a free Apple iPhone continue to emerge, this time from

Reuters

.

Apple is working on a stripped-down Apple iPhone, which helps heighten speculation that the company has decided to go with a freebie to crack the low-end market.

Apple is replacing the 16-gigabyte flash memory with cheaper 8-gigabyte chips in a new version of its iPhone 4, according to a

report

Tuesday by

Reuters.

The news echoes a report earlier this month by

the blog

Apple'N'Apps

, which called for a bargain-priced iPhone that Apple would sell as the

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iCloud iPhone

.

While there has been speculation for years that Apple had plans for a cheaper, nano-iPhone, nothing has materialized. But as

Google's

(GOOG)

Android phones

continue to outsell and outmuscle

the iPhone across a broader price range, Apple may feel the need to deliver something less expensive and more targeted to a mass market.

If Apple can make a cheaper version of the iPhone 4, carriers may subsidize the price to consumers in exchange for a two-year contract. In other words, Apple could have a free iPhone to go along with the upcoming iPhone 5 "world phone" due out this fall.

Both phones would still be a warm-up to the

4G LTE super iPhone

that, as first reported at

TheStreet

, is due next year.

Apple shares were up 2% to $364.16 amid a modest market rally Tuesday.

--Written by Scott Moritz in New York.To contact this writer, click here: Scott Moritz, or email: scott.moritz@thestreet.com.Follow Scott on Twitter at MoritzDispatch