Apple may have a new mobile phone to compete with–one that runs on its iPod Touch.

The MP3 player can be transformed into a mobile phone with the help of a free app from Internet telephone company Truphone. The new app allows users with a Wi-Fi connection to make and receive phone calls via voice over IP with other iPod Touch owners, users of the Google Talk’s messaging service, and customers of Truphone’s Internet telephone service. The company said it expects to add the ability to handle landline calls. The app creates a virtual keyboard on second-generation iPod Touchs to dial calls and requires the addition of a headset and microphone.

However, Apple doesn’t appear to be too threatened by Truphone; the application is available for free download at Apple’s App Store. While the app could work with any device with Wi-Fi access, the company said it has decided to focus on devices with connections to an apps store. “We’ve decided to focus on devices that are Wi-Fi-enabled and have an apps store,” Truphone CEO Geraldine Wilson told the BBC. “For the consumer, there has to be an easy way of downloading an application.”

Other planned features include the ability to phone and IM Skype and MSN VoIP users, and to check and set Twitter and Facebook.

Fring offers a similar service, allowing access to Skype users. But Truphone plans to add access to Skype, as well as landlines, which should make Truphone more appealing to many users.

Well, it could be a killer app, if they can fix the bugs. Unfortunately when I tried to download it, I get a message saying this application can only be used on an iPhone…hmmm.