Speculation about the device surfaced last August, but now Apple has filed a patent for a speech recognition system, fuelling suggestions that the firm is almost ready to unveil its service.
The speech recognition technology will allow Apple to assign "meanings to spoken utterances in a speech recognition system".
The move follows on from the success of Apple's iPod digital music player. Apple is understood to have forged a deal with US mobile company Cingular to help develop the phone.
When the phone launches, Apple will go head-to-head with mobile giants such as Nokia, Motorola and Ericsson. However, Apple's ownership of iTunes and the iPod should give it an advantage.
At present, Apple's biggest rival will be Microsoft, which is set to launch an alternative to the iPod before Christmas. The Zune musical player is designed with a bigger screen than a normal mobile phone, to make it better for watching videos. It will also have wi-fi capabilities to allow users to download media directly, without connecting to a computer.
Ericsson joined the portable music market last year, signing a global deal with download brand Napster to provide the technology allowing mobile phone networks provide music downloads for their customers across numerous different handset brands.
Last month, Apple, which sold almost 40m iPods this year, launched an internet TV service that allows customers to view iTunes and other content on their TVs via a wi-fi link to their personal computers.
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