"This is iPad mini," Apple's senior vice president for marketing Phil Schiller said as he displayed the new iPad at an Apple event in San Jose.
"This isn't just a shrunken down iPad," Schiller said. "It is an entirely new design."
The iPad mini's touchscreen measures 7.9 inches diagonally compared to 9.7 inches on the original iPad.
Apple's cheapest iPad mini to cost $329, ships next week.
Apple also unveiled a fourth generation of the original iPad on Tuesday and the California-based company said it has sold over 100 million of the devices in two and a half years.
Apple set the tablet computer market ablaze with the first iPad in early 2010 and stuck with its 9.7-inch screen while rivals introduced lower-price tablets with screens closer to seven inches.
Amazon's seven-inch Kindle Fire proved popular last year, and a new version was launched last month.
Meanwhile, a Google Nexus 7 powered by Android software joined the Samsung Galaxy in the seven-inch tablet market.
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