Steve Jobs, Apple's chief executive, is planning to use the iPod's phenomenal success as a springboard into the budget computer market.

Apple is reported to be preparing to unveil a low-price home computer that will retail in America for less than $500 (£260). It will be aimed at PC users who might be attracted to buying Apple's iconic music player, but who have concerns over compatibility. At present, Apple's entry level computer costs around $800 in the United States and around £550 in Britain.

The development of a cheaper Apple computer would also seek to build on the "halo effect" observed by a number of IT industry analysts, where iPod users opt to replace their PCs with Apple computers having being drawn to the brand by the music player.

According to Think Secret, the Apple users' website, the new Mac is code-named "Q88", and will be sold without a screen. It is to be revealed at an exhibition on January 11.

The iPod was launched in October 2001 and, in common with many Apple products, immediately won plaudits from tech aficionados for its sleek design. Sales have accelerated, reaching 2 million and $537 million in the third quarter of 2004, with that figure expected to double over the Christmas quarter. Such has been the explosive demand, Apple has been reported to be struggling to fill iPod orders.

Meanwhile, despite fierce competition, Apple claims it retains a 70 per cent share of the market in legal downloads. The company recently said that users had bought more than 200 million tracks from iTunes, its download service.

The iPod and iTunes have transformed Apple's business profile. After several years of flat sales, Apple's turnover has doubled in 18 months to about $12 billion.

Until now, the company has downplayed speculation it would compete in cheaper price brackets.

"In terms of our pricing, I feel very good about where each of our product lines are priced," Peter Oppenheimer, Apple's finance officer, said earlier this year.

"To date, we have chosen not to compete in the sub-$800 desktop market and have put that research and development investment in expanding our products in the music area, in software, and in hardware."

Experts have predicted that the PlayStation Portable will take the UK by storm with its "pin-sharp" graphics and ergonomic design.

The PSP has yet to launch in the UK but is expected to arrive in shops next March. Sony has not given a price although estimates put it at around £200.

However, it is likely to face competition from other handheld games consoles. They include Nintendo, which is expected to bring out a product called DS in the first-half of next year, although Stuff say it is likely to appeal to a younger audience than the PSP.

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