Rumors persist about a smaller iPad, which would diversify the company’s product line but create potential headaches for Apple developers who like producing for the iPad’s one-and-only form factor.

A move to a smaller device may also draw scrutiny from those looking to see how Apple may deviate from the company’s strategies under the rule of late co-founder Steve Jobs. Jobs was vocal about his belief that a 7-inch tablet wasn’t user friendly, saying in a conference call once that any smaller tablet should come with sandpaper for users’ fingers.

That said, the iPhone, of course, also uses apps and video on a much smaller screen and a move to a smaller tablet could have the double benefit of giving Apple a chance to further dominate the tablet fame and break into some key markets internationally.

Sterne Agee analyst Shaw Wu said in a recent note that he expects that the iPad mini is not a question of if, but of when. His checks with supplier shows that Apple has been working with smaller screens, though he said it’s not clear when such a product would be released. The screen would have the same resolution as the first and second iPads, he said, which would be easier on developers.

The introduction of a smaller iPad, he said, would be “the competition’s worst nightmare” and would help Apple make it more difficult for others to gain traction in the tablet market. With the iPad 2 already lowered to $399, any further price drops would bring it close to the Amazon Kindle Fire’s $199 price point.

Other analysts have said that a smaller iPad could help Apple in the all-important Asian markets, where many consumers use the iPad to replace their morning paper on the train. As Ian Song of IDC pointed out, some Asia/Pacific consumers would see the appeal of a smaller iPad because it would be less bulky.

Not everyone is on board with the rumor, however. At ZDNET, Adrian Kingsley-Hughes says that he believes that it just doesn’t make sense for Apple to sell a smaller tablet, particularly in the $250-$300 price range, because the margins just don’t make sense.

“A mini iPad might make sense if iPad sales were flagging, but there’s nothing to suggest that Apple is having a problem selling full-sized (and high-margin) iPads,” he wrote.

Related stories:

Apple’s smaller iPad rumors heat up again

Samsung official: iPad mini is on its way

The Verge: Apple reportedly working on 7.85-inch iPad