I don't understand why you would want a smaller sensor. The bigger
the sensor the better the image quality, (and as a bonus a smaller
DOF) This is true for any recording medium.
Right. So why would you want a 35mm sensor? Don't you want a 6 x 4.5cm sensor? No, wait, 4 x 5 inches is bigger, so the image quality is better. Better get one of those. Oh, but then there's 8 x 10" ...
The question is not what produces the best image quality in the abstract. The question is what produces the image quality that meets your needs, and how does it compare in price, features, performance, size, versatility, etc. to the other available options.
These forums seem to be filled with people who own 35mm format lenses who've suddenly become image quality absolutists. You know, the guys who were shooting medium and large format were kicking your ass. You never had the best image quality. You always had image quality that was just good enough, in a camera system that had other virtues like speed of operation, portability, and lower cost.
It's still true in digital. If image quality is the only thing that counts, go buy a Sinar 22. Or a scanning back. Or a three-shot camera.
If a new Nikon with an APS-sized sensor comes along and produces images that are good enough for the majority of users for whom the camera is designed, then that's all that matters. If it produces images that fall short of the expectations of a majority of those users, Nikon will pay a heavy price. But we won't know until the camera gets here.
Oy. Sorry for the rant.