Apple's stock price fell 3.5 percent. It had been on a tear since the company said it would be making an announcement on this day, rising 13.5 percent over the past week.
The company is fighting to maintain its lead in the digital media business at a time when the company faces renewed attacks from rivals including Microsoft Corp., which cut the price of its own wireless music device, the Zune.
Chief Executive Steve Jobs, who also showed off an iPod nano with a video screen, said the company was refreshing its entire line of music players. In addition, Apple's iTunes Web music store will begin selling songs over wireless connections, he said.
This means that for the first time, people can download songs directly to an iPod rather than through their computers.
Commenting on the stock move after the iPod changes were announced, Paul Foster, options strategist at Web information site theflyonthewall.com in Chicago, said: "Buy the anticipation and sell the reality. I guess investors were anticipating something more positive from Apple."
Apple shares, up about 70 percent this year, fell $5.00 to $139.16. Shares of iPhone service provider AT&T, which are up about 13 percent this year, fell 1.6 percent to $39.63 on the New York Stock Exchange.
Apple said the price of the iPhone model with 8 gigabytes of storage was cut to $399 from $599 and that it would discontinue a model with less memory.
"Apple has always been aggressive with price cuts to keep the competition at bay," Shannon Cross of Cross Research said.
Apple will also update its iTunes online music store to let customers turn songs into ringtones for the iPhone and to allow customers to buy songs while connected wirelessly.
The new touch-screen iPod will have many of the features of Apple's hit iPhone, including a touch screen, the ability to connect to the Internet wirelessly using Wi-Fi technology, and a mini Web browser.
"We've built in Wi-Fi and we've made it usable," Jobs said, in what could be seen as a dig at Microsoft's Zune, which beat the iPod to market with Wi-Fi but has not enjoyed the iPod's popularity.
Microsoft cut the price on its Zune by $50 to $199.
"Microsoft looks like it is entering Apple's territory in a larger way, which would lead to lower margins down the road in Apple products," said Tim Biggam, lead options strategist at online brokerage thinkorswim in Chicago. "But the long-range impact of Microsoft on Apple products remains to be seen," he added.
Apple also said it had struck a deal with Starbucks Corp. to let customers buy music from Apple's wireless iTunes music store while they are at one of the chain's coffee shops.
You can view the Photos of the press conference here. You can see a live video demo of it via Reuters here as well.
For more information on Apple and it's many different innovations discussed at it's press conference today, you can go to Apple's website.