The move is thought to help encourage new users to sign up and shift stock of 3G phones in preparation for a new iPhone rumoured to be available in the next few months including speculation on a new mid-range 'nano-style' device.
From April 3, customers who sign up to the 24 month tariff can get the 8GB iPhone 3G for free at £34.26 per month and the 16GB iPhone 3G for free at £44.05 per month.
On the 18 month contract the 8GB iPhone 3G costs £96.89 for the £34.26 per month, 16GB iPhone 3G costs £155.61 for the £34.26 per month, or £57.74 for the £44.05 per month.
A break down of price plans is available on the O2 Digital News Centre blog.
"The iPhone has been hugely popular with over one million units sold in the UK," said Peter Rampling, Marketing Director at Telefónica O2 UK.
"This new 24 month tariff option will meet the demand of customers who are looking for added value in exchange for committing to a longer contract."
Earlier this week, Apple introduced iPhone 3.0 - the next generation operating system for the iPhone - promising over 100 new features.
See also: Apple iPhone sales reach 17 million