(Credit: Jajah)

Internet phone company Jajah can turn the iPod Touch into an iPhone. (Download from CNET Download.com.)

The company, which competes with other low-cost Internet calling applications such as Skype, announced Thursday a new application that will allow Touch users to call and text messages using a voice over IP network instead of a carrier’s cellular network.

All that is needed to start making calls is the Jajah application, the latest version of the iPod Touch, a microphone headset, and a Wi-Fi connection. While the Jajah service can reduce calling costs up to 98 percent, the fact that it must be connected via a Wi-Fi network limits where it can be used. For this reason, it’s unlikely that the Jajah-enabled Touch would really steal business away from the iPhone, which is a full-fledged mobile phone that operates over a traditional cellular network.

Jajah plans to sell the application as a “white label” service. This means that it will license the application to wireless operators and non-wireless operators who offer it under their own brand instead of a standalone Jajah application. It’s unlikely the service will be offered for free. Instead, service providers might offer the application for $10 a month.

The application could be very useful for iPhone users too, especially those wanting to make low-cost international calls from their iPhones. But it’s not clear yet whether Apple would allow the application on its App Store, since it essentially bypasses the carrier network. Skype, which also provides free and cheap Internet calling, is not available on the App Store. That said, iPhone users can access Skype functions and users through other applications such as Fring and Truphone.