Apple Computer Inc. (AAPL) Tuesday said it would introduce a smaller and cheaper version of its popular iPod (search) music player next month to challenge rivals in the market for flash-memory-based digital devices.

In a presentation at Macworld (search) in San Francisco, Apple Chief Executive Steve Jobs (search) said that Apple had shipped 730,000 iPod units in the most recent quarter, giving it the market-leading position among digital music players.

Apple said it had sold over 2 million iPod units since the launch of the popular digital music player, which has won a following for its huge storage capacity and sleek design.

The iPod has also received a boost from Apple's online music store, iTunes, which the company said has sold more than 30 million songs -- an increase of 5 million tracks from the sales numbers announced by the company less than a month ago.

"This thing is on fire," Jobs said of the iPod.

The new "iPod mini" will be priced at $249 -- $50 cheaper than the current entry-level iPod.

The device, smaller than most cell phones, will offer 4 gigabytes of storage -- enough to hold about 1,000 songs -- and will be sold in five colors, Jobs said.

Analysts had widely expected Apple to introduce a cheaper iPod to head off competition from cheaper, flash-memory based music players, especially for a younger consumers.

In his presentation, Jobs said that the company would phase out its entry-level 10-gigabyte iPod and offer a 15 gigabyte model instead for the same price of $299.

The prices on the 20-gigabyte iPod and the top-of-the-line 40-gigabyte model, which is able to hold about 10,000 songs, remained at $399 and $499 respectively.