Techcrunch reports that google phone is not just a rumor.

The debate over Droid v. iPhone
rages on, but lots more Android surprises are on the way. Get ready for the Google Phone. It’s no longer a myth, it’s real.
Way more interesting are the rumors we’ve been hearing for months about a pure Google-branded phone. Most of our sources have unconfirmed information, which we describe below. But there are a few things we have absolutely confirmed: Google is building their own branded phone that they’ll sell directly and through retailers. They were long planning to have the phone be available by the holidays, but it has now slipped to early 2010. The phone will be produced by a major phone manufacturer but will only have Google branding (Microsoft did the same thing with their first Zunes, which were built by Toshiba
).
There won’t be any negotiation or compromise over the phone’s design of features – Google is dictating every last piece of it. No splintering of the Android OS that makes some applications unusable. Like the iPhone for Apple, this phone will be Google’s pure vision of what a phone should be.
Dave coursey of PC world thinks it is a bad idea. I also think it is a tricky thing considering google wants the mobile handset companies to adopt its mobile os android. This would position thema s competitors. It is like MS making their own computers. But mobile is a much different (read close) ecosystem. So may be google feels the heat from iphone and wants to control the user experience the way it wants it.