As rumors of a new, smaller “iPhone nano” swirl across the pipes, a report from Taiwan indicates that Apple may choose to go in the other direction for the next iPhone -- essentially keeping the same form factor but increasing the screen size to four inches to better compete with Android smartphones.

DigiTimes is reporting that the fifth-generation iPhone may get a boost in screen space, according to component suppliers in the manufacturing loop. The Taiwanese tech journal, who has had a mixed history with Apple rumors, predicts that Cupertino will make the move in an effort to take on larger-screen Android smartphones that are proliferating in recent months.

“The component suppliers noted that the production lines for Apple's next generation iPhone have begun testing, and Apple is interesting in expanding the screen size to 4-inches to support the tablet PC market as the vendor only has a 9.7-inch iPad in the market,” DigiTimes claims.

The website notes that popular Android-based handsets such as the Samsung Galaxy S and Google’s own Nexus S have already adopted a four-inch display, with Sharp and Acer launching even bigger handsets at 5.5 inches and 4.8 inches, respectively. Should Apple dive into the market for bigger smartphone screens, component suppliers could find themselves squeezed as the handset and tablet markets blur.

“What is worth noticing is that Dell has re-defined the market position of the Dell Streak 5 -- which was originally focused on the tablet PC market -- as a super phone,” the report concludes. “The Dell Streak 5 uses a 5-inch panel which stands in the gray area between tablet PC and handset segments and indicates there is an overlap in the market for 4- to 7-inch panels.”

A jump from 3.5-inch to four-inch screen for the iPhone 5 would make sense, assuming the rumors of an iPhone nano are true -- a bigger screen for the flagship handset would help differentiate it from a newer, cheaper sibling.

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