The rumor that started circulating last week is that Apple's new for-real-no-really-it's-happening-this-time-we-swear video iPod is going to have a larger (3.5-inch) screen that will incorporate a "virtual" click wheel on the screen itself. The touch screen aspect of the rumor was bolstered by patent applications from Apple showing how such an interface would work with the iPod, iTunes, and iPhoto.
Adding to the speculation is this video demonstration of a multi-touch research project from NYU showing how such an interface might work. Emphasis on might — note that the NYU project and Apple's patent application are unrelated. The Cult of Mac Blog gives one take on how the two could work together.
As for the practicality/feasibility of the rumor: err... maybe? It makes sense, and it would be an ingenious way to make an iPod with a larger screen but a similar overall form factor. It's certainly possible, as the Nintendo DS proves a touch screen display is practical even for the grubby fingers of little kids (and the greasy, oily fingers of older game players). At the same time, Apple's learning its customers are sensitive, litigious types who don't like having their expensive new MP3 players get all scratched up. We think this technology will eventually make it to the iPod line (or even better, the PowerBook) but not as soon as the rumor sites think.