The tablet market continues to grow, and one of the fastest-growing areas is with 7-inch tablets, aka the territory currently dominated by the Kindle Fire. But according to a recent report from the Taiwanese tech site Digitimes, Apple is getting serious about shrinking down its iPad to include a 7.35-inch model.

The report says that Apple will start producing the units in volume by the third quarter of 2012.

It’s important to note that Digitimes puts out reports based on information from its sources in Apple’s Asian supply chain, but not all of those reports turn out to be true. And there’s a lot that would suggest that Apple isn’t all that interested in a smaller tablet, since Apple’s co-founder, Steve Jobs, made no secret of his opposition to tablet screens smaller than the iPad’s 9.7 inches.

But the rumors of a smaller iPad have been persistent, and this report indicates that the smaller slab would likely retail for $249-$299, making it more competitive with the general tablet market.

A second report from Digitimes also pointed to evidence — again from unnamed people — that Apple will introduce a 16GB and 32GB iPad at an event next week, along with an 8GB version of the iPad 2 to further diversify the line.

Related stories:

Report: Production starts on Apple’s next iPad, iPad mini

Reports say iPad may shrink, but what’s your ideal tablet size?

Report: Google Nexus Tablet could begin production in April