Apple has cut the cost of the iPhone, according to market research firm iSuppli, with the new iPhone 3G costing just $173 (£87) to produce. That's over $50 (£25) cheaper than the original iPhone, which didn't include 3G or GPS components.

Apple caused a stir earlier this month when it launched the iPhone 3G with a $199 price tag in the US, and then UK partner O2 revealed it would be available for anything from free to £159 depending on which contract customers sign up to.

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There are two main reasons why the iPhone is so cheap, according to iSuppli. One is that mobile operators in each country subsidise the handset; the other is the low cost of materials going into the handset.

Apple did such a good job choosing components for the new 3G iPhone that it costs less to make than the old version, despite significant improvements, iSuppli said. The old iPhone cost $226 to make and did not include 3G nor GPS.

The most expensive component on the iPhone 3G is the 8GB of NAND flash memory storage, at $22.80, followed by the touchscreen at $20, iSuppli estimates.

In all, the chips and other components in the handset add up to $164, and then iSuppli estimates Apple is paying another $9 for assembly of the device, for a total of $173.

Taiwan's Hon Hai Precision Industry, the world's largest contract electronics manufacturer, is making the new iPhone at factories in China.

The market researcher calls its estimate a preliminary one based on a "virtual teardown" of the new iPhone. The estimate is based on information available about the new handset. Once the 3G iPhone is on the market, iSuppli plans to open one up to figure out the make and model of each component inside, to more exactly determine the cost of the handset.

The initial estimate also does not include the cost of software development, shipping, distribution, packaging and accessories included with each iPhone.