Hints that Apple has a small, Kindle Fire sized, version of the iPad in the works started making the rounds late last week.

Digitimes reported on Friday that, according to its sources in the supply chain, Apple has been in contact with two different manufacturers about purchasing 7.85 inch screens. The report says that production is to begin in the second quarter of 2012. That would mean it would be at least toward the end of 2012, or perhaps even into 2013, before a retail unit would be available for launch.

Amazon’s Kindle Fire has been selling like gangbusters. Over 1 million a week, according to Amazon. A major factor that has been driving the sales is price. At $199, the Kindle Fire is one of the best tablet deals around. With a similar sized tablet, Apple may be targeting the Kindle Fire, but it’s hard to imagine Apple competing in that price range. And the downward pricing pressure on tablets only appears to be increasing. Apple can easily build a more powerful and evolved Fire size iPad – no question about that. But would enough shoppers be willing to pay for it? Or would Apple cut corners and prices, following Amazon’s lead?

It’s hard to say how this will shake out. But as we have mentioned here at CP in previous stories, the tablet market is volatile right now and it’s likely to stay that way for quite some time.