Apple has unveiled the pencil-thin iPod nano, its replacement for the iPod mini.

The latest music player uses cheaper flash memory rather than hard drives, which are used in more expensive iPods.

It will be available in two models: 2GB holding up to 500 songs for just $199 and 4GB holding up to 1000 songs for just $249.

Chief executive Steve Jobs introduced the new machine at a special music event in San Francisco.

He said: "The iPod nano is the biggest revolution since the original iPod... iPod nano is a full-featured iPod in an impossibly small size, and it’s going to change the rules for the entire portable music market."

Jobs also introduced version 5 of the iTunes music software which includes support for playlists in nested folders, as well as the Motorola ROKR mobile phone with iTunes support.

The iPod nano features an ultra-portable, lightweight design with color screen and is available in either white or black.

It also offers a graphical clock, stopwatch, games, a calendar, a contact list and a screen lock that uses the click wheel like a combination lock.

Like the iPod shuffle, the iPod nano uses USB to connect to either Mac or PC computers.

The iPod nano is the newest member of Apple's wildly popular iPod family for both Mac and PC which includes the fourth generation iPod, the iPod U2 Special Edition, iPod photo and iPod shuffle.