The tech giant's chief executive Tim Cook promised the cheap 5C gadget would come with "all the great technology that customers have loved" on the firm's previous models.
Apple announced the departure from its traditional high-end handsets just minutes before it confirmed rumours that the iPhone 5S would be equipped with a fingerprint scanner to unlock the device and put an end to the days of passwords.
The cheaper version of the iPhone - launched at a time when Apple arguably faces stiffer competition than ever in the mobile phone market - will be an obvious rival to some of the low-cost devices sold by the firm's major competitors.
Mr Cook introduced the device during a presentation at Apple's California HQ - streamed live at a conference in Berlin - which he used to introduce the iPhone 5S, "the most forward-thinking phone we have ever created".
The new flagship mobile - dubbed the "gold standard in smartphones" by the tech giant - will come in more traditional Apple colours of silver and slate grey as well as a new golden hue.
The cheaper 5C costs £63 over a two-year contract or £469 to buy.
It is billed as a handset that will be "more fun" than any iPhone yet and will come in a range of five vivid colours: blue, white, pink, yellow and green.
A series of images leaked online claimed to show the 5S while the web was awash with speculation that Apple would also branch out with a budget device.
Apple's Philip Schiller told the audience: "iPhone 5S is the most forward-thinking smartphone in the world, delivering desktop class architecture in the palm of your hand."