First things first: this is just a rumour. Since the rumour seems very reasonable and comes from Think Secret (they have been right before) we believe that at least some of it is true.

So what does the rumour say? The new iPod video will have a 3.5″ display covering the entire front of the player. The panel is touch sensitive and you navigate by using a brand new digital click wheel. Read all about it over at Think Secret.

True video iPod to sport 3.5-inch display… [Thinksecret.com]
iPod 7th generation mockup [md3d.com]