The launch of such a phone - expected to be called the iPhone SE - would represent Apple's second bid for the crowded mid-tier market after an unsuccessful foray three years ago.
It might give the world's best-known technology company a boost in the fast-growing Indian, Middle East and African markets but also risks cutting its average phone prices and profit margins.
"The iPhone SE provides a new incentive to upgrade for iPhone holdouts who don't want a large-screen phone," said analyst Bob O'Donnell of TECHnalysis Research.
A less expensive iPhone could appeal to emerging markets customers, said O'Donnell. But it is not a sure-fire hit because it may still be pricier than competitors running Google's Android system and many people in emerging markets have already developed a taste for larger screens.
As is its tradition, Apple has been silent about what is on offer ahead of an event in Silicon Valley on Monday, but technology and financial analysts have predicted a cheaper, entry-level phone with a screen around 4 inches (10 cm) that still runs some of the latest features such as Apple Pay.
Apple's online store was closed ahead of the event, showing only the words: "We can't wait to show you what we have in store."
Dozens of reporters gathered outside an auditorium at Apple's leafy Cupertino, California headquarters early on Monday. They were waiting for access to a venue that is much smaller than the massive San Francisco stages where the company typically unveils new iPhones and major products.
The more compact phone design comes after its move to expand the size of the screens in its high-end iPhone 6 and iPhone 6 Plus phones in 2014 to as large as 5.5 inches. That was broadly seen as an attempt to match rival Samsung Electronics with its large-screen Galaxy phones.
The iPhone is sold around the world, but with a price starting at $649 for the current top model without a contract, it is beyond the reach of many. A mid-range or entry-level phone could broaden Apple's appeal, although it is not clear what price range it will target.
Technology research firm IDC is expecting an uptick in sales of devices running Android this year, to account for almost 83 percent of smartphones sold worldwide. It expects iPhone sales to fall slightly, making up 15 percent of the market.
Apple said in January it expects a decline in iPhone sales overall this quarter compared to the same period a year ago, the first such dip since Apple essentially created the smartphone market nine years ago. The product drives about two-thirds of Apple's sales, and no other gadgets in its lineup are close in popularity.
Second attempt to penetrate entry market
Wall Street analysts worry the company does not have another blockbuster product to replace the iPhone. Apple is also expected to announce a new iPad on Monday in an attempt to buoy flagging tablet sales, and new bands for Apple Watch, the wearable gadget it released last year to mixed reviews.
If the iPhone SE is unveiled on Monday, it will be Apple's second run at the entry-level or mid-tier market following the iPhone 5c, a lower-end phone with a colorful plastic body that was launched in 2013. After initial excitement, it did not prove to be a big seller and has been dropped from Apple's lineup.
The anticipated iPhone SE could give Apple a short-term boost without running into the low end of the smartphone market dominated by Android devices, said analyst Patrick Moorhead of Moor Insights & Strategy, especially if it has the company's high-powered A9 chip and supports a feature that makes phones work better on wireless networks, called "carrier aggregation."
But even with that, he warned the new phone will face tough competition from Android.
"The new phones from Huawei, LG, Samsung and Xiaomi are the best I have seen from them in years," said Moorhead.
Apple shares were up 0.8 percent at $106.78 in midday trading. The stock is down almost 20 percent from its all-time high closing price of $133 in February 2015.
© Thomson Reuters 2016