I seriously doubt it. Despite the existence of photos such as this, there is very little real-world evidence to suggest that Apple is working on an smaller version of the iPhone. MacRumors.com goes so far as to say, "This image, which was submitted anonymously, provides a glance at what the rumored iPhone nano may look like. The images appear consistent with previously released case designs for the rumored device. At this point, we have no reason to believe this photo is real and are labeling it a 'concept' design for the sake of discussion and debate."
My doubts are fueled by the lack of leaks from Apple's Asian manufacturing partners. None of the usual suspects is showing off designs, cases, innards or anything else that would suggest an iPhone Nano is in the works.
I also don't think an iPhone Nano makes a lot of sense for Apple to bring to market. The current 3G iPhone is already lacking in many respects compared to other smartphones. I'd hate to see a version of the iPhone with even fewer features than what is offered by the current hardware.
Analysts don't seem to be keen on the possibility, either.
So, please, iPhone Nano rumor, just go away.