The standard 8G version of the combined phone and music player is now priced at £169 after O2 and its sole retail partner The Carphone Warehouse decided to drop the price until June 1. Apple's larger 16GB iPhone will remain at £329.
O2 has denied that the price cut was linked to fewer-than-expected sales and said it "will create additional momentum for what has been [its] fastest-selling device".
An O2 spokesman said: "The iPhone has been very successful but we want to expand it even further and price is a very good way to do that."
However, Apple confirmed its own London store would not be introducing similar price cuts.
The move comes amid growing speculation that Apple is about to launch a new 3G model of the iPhone in June, which will lead to faster internet access than the current 2.5G model.
Apple has refused to comment on the rumours, which suggest that there will be an 8GB 3G version of the phone in the US for $399 (£200) and a 16GB 3G version for $499.
The current 2.5G version is very slow to download information, such as music tracks, and therefore users are forced to connect via their home computer network or public wi-fi access points to speed it up.
O2's price cut follows a recent price reduction in Germany where T-Mobile, iPhone's exclusive network operator there, slashed the price of the 8GB version to €99 (£78).
The price cuts are liable to upset some Apple customers who have bought the phones at the higher price. However, Carphone Warehouse has said it would refund the £100 to customers who bought their phones in the last eight days.
Andrew Harrison, Carphone Warehouse chief executive, said: "The iPhone has changed the landscape and we're delighted that we can lower its price and broaden its appeal."
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