Apple is believed to be developing a smaller, 7.85-inch iPad to go on sale later in the year, which will compete against Amazon's Kindle Fire at the lower end of the tablet food chain.

The Apple rumour mill DigiTimes reported that the Californian company has been sampling smaller displays it has received from manufacturers and mass production of the mini iPad could begin in the third quarter of 2012.

"Makers in Apple's iPad supply chain have started delivering samples of 7.85-inch iPads for verification, with volume production likely to begin in the third quarter of 2012 at the earliest, according to industry sources," DigiTimes said.

Although it has yet to become available internationally, Amazon has had huge success in selling its 7-inch Kindle Fire tablet for $199 (£125) in the US. Apple is now predicted to sell a smaller iPad in the $250 to $300 price range.

Despite other manufacturers like BlackBerry and HP struggling to sell their own tablet devices, Amazon has enjoyed strong sales of the Kindle Fire since its launch in October, with more than one million per week being sold in the run-up to Christmas 2011.

DigiTimes anticipates that Apple will also produce an 8GB iPad 2 (half the capacity of the current smallest model) to sell between the smaller iPad and the new iPad 3, which is expected to be announced by Apple on 7 March.

The website claims Apple will begin selling a range of iPads - much like it does with the iPhone, where the 3GS, 4 and 4S are all currently for sale. The company would sell a small iPad for around $275 and an 8GB iPad 2 for $375, with the 16GB model costing $450 and the new iPad 3 retailing for $500 or more.

All we know for sure is that Apple is holding a media event simultaneously in San Francisco and London on 7 March at 6pm GMT, where it will almost certainly announce a new iPad, just under a year after the iPad 2 went on sale.