The reduction has also been matched by the other only supplier of the sought-after Apple phone, the Carphone Warehouse, after larger reductions in Germany.
This could be good news for students who enjoy listening to music on their mobile phones.
O2 cut the price of the 8 GB phone on Tuesday to £169, down from £269.
Earlier in the month on the continent, T-Mobile dropped prices in Germany by 75 per cent to 99 euros (£79), for customers taking out its most expensive call-plan.
The Financial Times reports that France Telecom's Orange is also expected to cut prices soon.
Information Week reported that an Apple spokesman said the company was not involved in the promotion and prices were unchanged in Apple stores.
The price cuts have fuelled speculation that a newer faster iPhone may be on the horizon.
Meanwhile, the Guardian reported this week that Nokia warned the global mobile phone market was likely to suffer its first decline in value.
The phone giant, which makes two out of every five handsets sold worldwide, said the number of phones sold would still increase by ten per cent annually.
It expects the average price of handsets to decrease because of the intensity of the market's competition.
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