There’s an interesting rumour circulating today claiming that Apple is currently testing 7.85-inch iPad displays from Taiwanese panel maker AU Optronics, suggesting that the Cupertino-based company is set to engage both Samsung and Amazon and its Galaxy Tab and Kindle Fire tablets in the handheld market.

The Economic Daily News supplies the rumour, stating that not only is Apple testing the panels, it has already set the specifications for the smaller tablet and is looking to release a 7.85-inch iPad that will boast the same resolution as the iPad 2 early next year.

The news report, if true, would contradict statements made by Apple’s then CEO Steve Jobs during an Apple earnings call in 2010, in which said the screen was too small and people would have to “use sandpaper to sand down their fingers to use the screen”. This was followed by the 7-inch size “isn’t sufficient to create great tablet apps” and that “10-inches is the minimum tablet size”.

Add in the final ”7-inch tablets are tweeners; too big to compete against a smartphone, and too small to compete with the iPad,” and you have quite an argument against why Apple wouldn’t be testing 7.85-inch panels for a new, smaller iPad.

Last week, we reported that Apple had reportedly ramped up iPad production, ordering 1 million iPad 3 units in the process.

In the past, Apple has been clever to dismiss its competition before emulating it and bringing its own twist to the table. However, when it comes to hardware, Apple has long been the leader in space and it would be a massive mark of respect to Samsung and Amazon (and other 7-inch tablet makers) if it was to target a device to outperform its rivals in the space.