Conventional smoke alarms detect smoke particles by the way they scatter light. But they work using a small chamber that allows smoke in while keeping out ambient light. This makes the detector too big for a small phone.
Nokia gets around this by putting a light emitter and detector in the side of the phone. Any smoke particles in the air then scatter light from the emitter into the detector which then triggers an alarm or dials a pre-programmed number.
It gets around the problem of ambient light triggering the detector by using an infrared beam or by pulsing the beam in a way that ambient light cannot reproduce.
The device can also work as a proximity sensor by detecting objects that come within a predetermined distance of the phone, Nokia claims. This might be useful as an intruder alarm, sounding if someone comes through a hotel door while the owner is sleeping, for example.