The rumour was around for months before finally confirmed by Sony about the lack of PS2 backwards compatiblity in the most recent (40gb) model, which also saw the loss of some USB ports and flash memory ports, again cost cutting.
There's been three versions of the PS3 to date:
US / JAP launch - 60gb - with both the 'Emotion Engine' and 'Graphics Synthesisor' in silicon on the PS3 motherboard, to give full hardware backwards compatiblity with PS2 games.
EU launch - 60gb - (And later US/JAP models) - only the 'Graphics Synthesisor' in silicon, with the Cell emulating the Emotion Engine in software. With the hardware/software emulation mix not all PS2 games would work, and some with glitches.
Current model - 40gb - 'GS' removed, so no backwards compatiblity at all.