It makes a lot of sense, considering people's fascination with larger screen real estate, brought on by flagship Android handsets like the Samsung Galaxy S, which proved that phones with bigger windows are not unwieldy, if the design is done right.
Still, Digitimes is not always the most credible source, despite our wish for a larger screen iPhone. Coupled with the rumor about the smallish iPhone nano that is in the works, this might mean that Apple will diversify its iPhone portfolio, and drift away from the one-size-fits-all approach.
What will happen with the resolution and the Retina Display moniker, if these 4" screens are not just tests, is anyone's guess.
source: Digitimes via Electronista