This might be a logical step considering the Safarii browser has 6-7% market share, and currently uses Google as the search engine for both the standard and iPhone/iPod versions. Also, Apple can’t be happy with Google’s competition to the iPhone with Android.
TechCrunch notes that "one important fact that isn’t checking out - if Apple were building a search engine, they’d be hiring search experts and engineers. We’ve talked to a ton of them at all the big companies, and while some of them heard the same rumors, none have lost search employees to Apple, or heard of any specific hirings. That alone almost certainly rules out a full on search competitor. You can’t do it without people who know what they’re doing."
They instead believe that Apple is not happy with the search experience on its mobile devices, and may be trying to improve on it and create a much more visual experience then exists today. Essentially, Apple may be working on a new frontend to Google.