But how will it look like and what is included as Features? I want to give you my own theories:
Features
I think that it will have a slower CPU than the iPhone and no OpenGL compatible graphics. More on that later.
I don't think that the iPhone nano will have a camera, so we leave that (1 less app on the Homescreen).
As a mobile Phone it will have Bluetooth and i think it will also have wireless networking and EDGE (minimum, I think 3G could be possible too).
Surfin' the web on the iPhone nano: normal websites will be very difficult to read, but i think that the iPhone optimized websites as they currently exist will work on it very well.
But if it is really "nano" which means it will be a little bit smaller than the original, the screen will be smaller too. A smaller screen will make it very difficult to type on the on-screen keyboard.
What has to happen if you can surf the web and write SMS with it?
For writing SMS it would be enough to have a dialer field (12 Buttons, 3x4) as on a normal cellphone and T9 writing Engine, this should work very well for SMS, but for surfing the web it could be possible with the dialer field, but it wouldn't be very comfortable and an on-screen keyboard as the "big" iPhone have would be to big or if it gets scaled down, it would be difficult to type on it, no idea on that, maybe a handwriting recognition.
As it is an Apple product, it will have the iPod App to listen to music and watch movies and podcasts.
Will their be apps for the iPhone nano?
I think there will be apps and some games, but no games or apps where you always have to put your fingers on screen the whole time, this would cover to much of the screen, but games like Sneezies or Tower Defense Games and ToDo Apps etc will work as you just look at the screen and sometimes you just tap on it. Games like Real Football 2009 wouldn't work so no OpenGL needed.
Accelerometer?
As the iPod nano has one, the iPhone nano will have one to
Appearance
How will the iPhone nano look like?
Basically it will look like the current iPhone 3G, black or white plastic covers on the back (as it's Apple it would be nano-chromatic, but iPhone would just be black and white), the screen will be smaller (as it is called "nano"), Homescreen will have 3x4 icons and not 4x5 icons.
Icons on the first page after a fresh new installation
Homescreen
- SMS
- Calendar
- Photos
- YouTube
- Stocks
- Maps
- Weather
- Clock
- Calculator (no scientific mode)
- (Notes)
- Settings
- iTunes
- (AppStore)
Dock
- Phone
- (Mail)
- (Safari)
- iPod
This would make 13-17 icons. Notes, Mail and Safari are in brackets, because I don't know if they will work on a small screen, because of the text input.

All the informations here are just ideas, no real data from Apple or some insider, just thoughts of mine.