The easy part might be manufacturing a screen size nestled between the iPad mini and iPod touch. I think someone suggested in an earlier thread halving the current iPad mini screen could achieve that at Retina quality. I'm not sure; I haven't run the numbers.
It seems like the larger issue would be branding and pricing. Apple did well enough with the iPod mini, but as screen size/spec/pricing differentiation gets squeezed, the problem appears more confounding.
Perhaps a larger iPod touch and discontinue the 2012 model? Unlikely, as the production lines probably haven't turned a profit yet. And what about pricing?
An iPad nano at ~5"? That seems more likely, but how would they price it?
An iPhone "maxi" ?!?!
A case can be made now, even more than last year with the mini threads, of possible customer confusion around product differentiation.
It would be quite the "magic" trick for Tim and Phil to market and ship a new product category in there that immediately makes sense and has impact.