The company also revamped its iPod media player lineup yesterday, introducing a model called iPod Touch that incorporates the iPhone's touch-screen and adds the ability to wirelessly download songs directly. It introduced a new version of the best-selling iPod, the Nano, that plays video.

And it announced a partnership with Starbucks: Starting in October, the coffee chain's icon will light up on the Touch whenever a user nears a shop that has Wi-Fi access. Users can then download the song that is playing in that Starbucks shop or get a list of the 10 most recent songs played. Financial terms of the deal were not disclosed.

Analysts expect Apple's new iPods will help the company clinch yet another blockbuster holiday selling season. But it will also have to deal with investors who love Apple's meaty profit margins and customers who are suffering from a bit of buyer's remorse.

The 8-gigabyte iPhone will now cost US$399 -- one-third cheaper than when it went on sale June 29. The 4-gigabyte iPhone, which sold for US$499, will be phased out. By comparison, the iPod Touch will sell for US$299 for the 8-gigabyte model and US$399 for the 16-gigabyte one.

Apple stock dropped more than 5 percent after the price cut was announced, closing at US$136.76, down US$7.40 cents. In extended trading, it lost another US$1.01.

The steep price cut less than three months after the iPhone's launch is a surprise from Apple, which usually keeps prices steady while adding new features and offers discounts only when a product begins to get old.

One customer, Ryan Roth, who bought an iPhone for US$599 on Friday after months of research, chalked up his purchase to "the worst timing ever."

Yet analysts say quick discounts are typical for the cell phone industry. The world's best-selling cell phone, Motorola Razr, for instance, debuted at US$499 but can now be bought for less than US$100.

"This is about Apple learning how to become a cell phone retailer," said Jeff Kagan, an independent telecommunications industry analyst. "All of a sudden it's in the cell phone business, and everyone is trying to figure out how to measure it, and we don't know yet."

Apple CEO Steve Jobs said the company is on its way to selling 1 million iPhones in the United States by the end of September.

Apple executives characterized the revamped and expanded iPod line -- in which the iPhone is cast as its top model -- as its most robust lineup ever for the holiday season. In 2006, Apple sold a record 21 million iPod players during the holiday quarter, about 50 percent more than in the same period the year before.

In all, Apple has now sold more than 110 million iPods since they debuted in 2001.

The new iPod Touch Jobs unveiled at a special media event Wednesday will, like the iPhone, have a 3.5-inch (8.89-centimeter) touch screen and wireless Internet access, allowing users to download songs directly to the gadget. The Touch also similarly can be used for storing photos, music, videos and other digital data.

And users will be able to scroll through menus with a light touch of a finger and use two fingers to resize photos, as they can with an iPhone. But it will not operate as a cell phone.

The new iTunes Wi-Fi store will become available after the iPod Touch starts shipping worldwide later this month, and stores around the country will come online in stages in coming months.

People using the iTunes Wi-Fi store will be able to download songs for the same price as they would pay at the regular iTunes store, which charges 99 cents per song.

The Starbucks partnership begins at 600 stores in New York and Seattle on October 2. In November, it will be available at 350 stores in the San Francisco Bay Area, and by the end of next year it will be in all Starbucks with Wi-Fi nationwide.

The new Nano, which will be in stores starting this weekend, will come in a 4-gigabyte version for US$149, and an 8-gigabyte version for US$199.

Apple also announced it will be selling ring tones for the iPhone for 99 cents, plus the 99-cent cost of the song. Ring tones from more than 500,000 songs available on iTunes will go on sale next week.