Today Sony Computer Entertainment of Europe sent out a press release stating that the model of PS3 that is to be released on March 23rd in Europe will not include the Playstation 2 hardware found in American and Japanese models. The exclusion of the PS2 CPU and graphics processor means that Sony is utilizing software emulation, similar to how the Xbox 360 accomplishes backwards compatibility, to emulate old PS2 titles.
The press release states that the new PS3 will have broad Playstation 1 compatibility, but only limited PS2 compatibility. Current PS3 models currently support 98% of PS2 games, limited is an ambiguous word, but Sony reps stated that the number of supported games would be far fewer than 98%, with an actual percentage not given.
This new PS3 model won't be limited to Europe, but is making its introduction there first. It's always been part of Sony's plan to replace the PS2 hardware inside of the PS3 with a software emulation solution, in an effort to cut costs. The new model has been released earlier than many have expected, and the level of software compatibility is the big unknown right now that will determine how serious this will affect consumers.