In the weeks leading up to Steve Jobs' keynote speech at MacWorld today, the rumor mill was rife with talk that a new iPhone and a widescreen iPod were on the way.

iPhone

Apple delivered, but in typical fashion, it did the rumor mill one better: the widescreen iPod IS the iPhone.

In front of a sea of fawning sycophants at the Moscone Center in San Francisco this morning, Jobs unveiled a widescreen, touchscreen cell phone with music, video, e-mail, and Web capabilities, soundly answering Wall Street concerns about the company's ability to take its dominant iPod music player to the next level.

"I couldn't sleep last night, I was so excited about today," Jobs said. "We have reinvented the phone."

The iPhone will cost $499 for a 4GB model and $599 for an 8GB model with a two-year wireless service contract; it will ship in June in the US, by the end of the year in Europe, and in Asia in 2008.

The touchscreen will allow users to interact with their music and video through iTunes directly, scrolling through playlists by moving their finger across the screen.

iTunes on the iPhone will also feature the "cover flow" tool that allows users to scroll through their music with cover art, much like the experience of browsing through a CD rack.

"Now you can touch your music," Jobs said.

iPhone will also support video playback on its 3.5 inch display screen. It will also come loaded with several features that Jobs called "desktop-quality applications," such as iTunes, Safari Web browser, Google Maps, and Yahoo Mail.

Jobs brought out Google CEO Eric Schmidt and Yahoo Chief Yahoo Jerry Yang to celebrate Apple's deal with their respective companies to provide applications for the iPhone.

Steve Jobs at MacWorld.

"This product is going to be hot," Schmidt said.

Apple picked Cingular as its exclusive wireless provider for the phone. The two companies had paired up on the ill-received, iTunes-ready Rokr phone in 2005. Cingular CEO Stan Sigman told the crowd that his company entered into a deal with Apple for the iPhone without ever seeing the design of it.

"This is really, really cool--you have exceeded my expectations," he said.

Jobs also unveiled the set-top box that he offered as a teaser last fall. The $299 device allows users to view their media on their TVs wirelessly.

Apple said it has struck a deal with Paramount Pictures to add that studio's movies to iTunes, bringing the iTunes movie catalog to 250 movies.

Jobs also said that iTunes had surpassed the 2 billion song mark. Jobs said that while it took almost three years for iTunes to sell its first billion, it sold its second billion in just 10 months.

"We couldn't be happier with the growth rate of iTunes and selling 2 billion songs," Jobs said, noting that iTunes had passed Amazon to become the fourth biggest seller of music, bringing it right behind big-box retailer Target. "We sell more music than Amazon today. And you can guess who our next Target might be."

Grammy nominee John Mayer closed the event with a short solo performance, saying of the iPod, "It's like the opposite of terrorism."

Shares in Apple rose $6.64 on the news, a 7.6 percent spike to $92.11.