O2 and Carphone Warehouse to offer iPhone for free

The 16GB 3G iPhone will cost £159 on the £30 tariff and the existing £35 tariff, or £59 on the £45 tariff. It will come free if the user chooses the £75 tariff. The old model was originally priced at £329.

The price reductions are more agressive in the UK than the US, where Apple has reduced the 8GB model from $399 to $199 and the 16GB model from $499 to $299.

The phones will go on sale in the US, UK and 20 other countries on July 11.

At yesterday's product launch, Apple chief executive Steve Jobs admitted that the high price, which resulted in Apple selling just 5.4m iPhones since their June 2007 launch, had been a mistake.

He said: "The number one reason why people didn't buy iPhones is because they just couldn't afford it."

Apple has set a target of 10m global iPhone sales this year. The new model's 3G capability is predicted to lead to much better take-up in Europe.

Jobs revealed that Apple had heavily tested the new model with corporate users and will be making an effort to target them.

The iPhone 3G includes more corporate-friendly software, making company email, calendars and contacts available to users.

Despite the cut in the price of the handset in the US, there were gripes about the requirement for a two-year contract with AT&T, on which monthly charges have been increased from $60 to $70.

Apple is also clamping down on people's ability to buy the handsets and unlock them to use on any network. Phones will now have to be activated in store.

Vodafone has won the contract to sell it in many countries, including Italy, Portugal, Australia and New Zealand.