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Olympus made a name for itself by pioneering the downsized SLR. The new E-420 ($500, estimated street, body only; $700 with 25mm f/2.8 Zuiko Digital lens) continues the tradition of tiny cameras packed with big innovations.

Billed as the world’s smallest and lightest DSLR (3 ounces lighter than the next-smallest, the Nikon D40x), the E-420 combines 10MP capture, live view, and clever picture fixes. In keeping with the small-is-better theme, Olympus is pairing the camera with a new 25mm f/2.8 pancake lens that protrudes less than an inch. (With the Four Thirds system’s 2X lens factor, it’s a 50mm equivalent.)

Replacing the E-410, the E-420 uses the same Live MOS sensor but promises greater dynamic range, better white balance, and more accurate color. Olympus says color reproduction should be on a par with the pro-level E-3, which hit stellar color accuracy numbers in the Pop Photo Lab (February 2008).

Like its predecessor, the E-420 flips up the mirror for live view, and can autofocus with 3-point phase-detection sensors by way of a quick flip down. It can also autofocus almost anywhere in the frame using contrast detection on the image sensor. A third AF method, hybrid, starts with contrast detection, then touches up the focus with phase detection.

The E-420 adds Perfect Shot Preview, which displays thumbnails showing the effects of exposure compensation and white balance tweaks. A new control, Shadow Adjustment Technology, can bring up shadow detail while keeping highlights at bay. Face-detection technology (up to eight faces) makes the visage a priority for shadow adjustments, as in backlit portraits.

The LCD has been modestly upsized to 2.7 inches, with twice the contrast (better in bright light). The burst rate gets a bump up to 3.5 from 3 frames per second, tying it with the Canon EOS Rebel XSi as fastest in this class. An improved grip in front provides a more secure hold.

Speaking of holding, the preproduction E-420 we handled proved nearly shocking in its tiny size and light weight. (Some staffers initially thought it was a compact!) Large-handed testers — men and women both — found it a little too small. Small-handed users, though, loved it.

Operationally, the E-420 is quite similar to the E-410, and inherits the dual card slot for both CF and xD Picture cards, self-cleaning sensor, and wireless flash capability with the Olympus FL-36R and new FL-50R units. But no sensor-shift image stabilization — you have to buy an Olympus E-510 (or E-3) for that.

The E-420 will also be sold with the 14-42mm f/3.5-5.6 ED Zuiko Digital kit zoom for a projected $600, street. The 25mm lens will be available separately for $250, estimated street.