Microsoft is designing and building a Zune-powered Windows Mobile smart phone. It will be sold by wireless giant Verizon in the United States starting sometime next year. And the phone, code-named Pink, will compete strongly with Apple's iPhone, offering a touch screen and other iPhone-like features.

Sounds interesting, right? There's just one problem. Microsoft says none of it is true.

Rumors of a Microsoft-built, Zune-based phone first surfaced last year, and I've been told directly by at least two Microsofties that the company is working on something it calls "Zune Mobile," providing me with the tech-industry equivalent of a secondhand UFO sighting. So what's really going on?

According to analysts, Microsoft is probably working on one or more reference designs for Windows Mobile-based phones that will include Zune digital media software. Microsoft has already publicly stated that it plans to bring the Zune interface to mobile devices and the living room, and the obvious integration points in these markets are Windows Mobile phones and the Xbox 360, respectively.

The most likely scenario is that the engineers from Sidekick-maker Danger (which Microsoft previously purchased) are working on a consumer-oriented smart phone design that's code-named Pink and comprised of a Windows Mobile-based OS with Zune digital media software and a hardware reference platform that device makers will be able to extend.

It should be noted, too, that Microsoft hasn't denied that it's speaking with Verizon about new devices, but of course Microsoft is probably speaking with all major carriers on an ongoing basis. The software giant is obviously interested in seeing its hardware and wireless partners carry devices that compete better with the iPhone but are less expensive.

Adding fuel to the fire: Verizon CEO Lowell McAdam "met face-to-face" with Apple Operating Chief Tim Cook last month to discuss bringing the iPhone to Verizon, the largest wireless carrier in the United States. Apple claims it is "very happy" with AT&T, its sole US carrier, but let's be serious here: No one is happy with AT&T, whose 3G network is the spottiest of the major networks. AT&T would be the market laggard if it weren't for its exclusive iPhone contract with Apple. Microsoft is probably worried about the iPhone getting a second, superior carrier in the United States.

In the meantime, Microsoft is busy prepping a May launch for its upcoming Windows Mobile 6.5 system, which will start appearing on new devices in Q3 2009. Beyond that, of course, is the Windows Mobile 7 wave. If Pink is to come to fruition, it will most likely be part of that next revision.