Breathe deeply gadget pundits: Even as the hype around the would be Apple iPhone hits fever pitch, Google has dropped a telephonic g-bomb. David Smith at The Observer reported yesterday that Google has been in talks with European cellular biggie Orange regarding the creation of a Google-powered cell phone. Writes Smith:

Executives from Orange flew to Silicon Valley in California for a meeting at Google's headquarters, or 'Googleplex', to hold preliminary discussions about a joint deal. Their plans centre on a branded Google phone, which would probably also carry Orange's logo. The device would not be revolutionary: manufactured by HTC, a Taiwanese firm specialising in smart phones and Personal Data Assistants (PDAs), it might have a screen similar to a video iPod. But it would have built-in Google software which would dramatically improve on the slow and cumbersome experience of surfing the web from a mobile handset.

If true, this is clearly biggish news, signaling a new direction for Google. Both Google and Orange refused to talk to Smith for the story, and the blogs seem split on whether to buy the report. "Somehow, I am a bit skeptical on this one," writes Rafat Ali. But Om Malik is more generous: "Google Phone, if you think about it is a reasonable speculation," he writes. "Google has been aggressive in developing location based services, has amped up its local search and mapping services. In addition, it has also been mobilizing its applications such as GTalk and GMail. YouTube, the video arm of Google, is beginning to embrace the mobile ecosystem."

OK, we say if it's not happening now, it's likely to soon. But the thing that catches our attention in all this is the very plausible notion that Google would leave the hardware to someone else. Sounds a lot like, um, Microsoft, no? And what's the likelihood, we wonder, that this HTC outfit will put together the sort of slick integrated phone that we all crave? With Google ascendant, are we all in for another era of hokey, generic hardware married to proprietary software?

For now, we're still holding out for the iPhone.