The company said its most popular console, which comes with a 20-gigabyte hard drive, will cost $349.
A basic console without a hard drive or wireless controllers will retail for $279, $20 less than its current price, while the Xbox 360 Elite, a black version with a 120-gigabyte hard drive and high-definition video support, will drop $50 to $449.
In July, the company clipped the price of its add-on HD-DVD player to $179, from $199.
Microsoft has been dodging questions about a console price cut since competitor Sony Corp. slashed the price of its 60-gigabyte PlayStation 3 to $499, from $599, in early July. Nintendo Corp.'s Wii, the least expensive of the so-called next-generation consoles, costs $250.
Last week, spokespeople for Wal-Mart Stores Inc., Toys "R" Us Inc. and Microsoft all refused to say whether blurred images found online — purportedly showing weekend ad circulars reflecting the price cuts — were authentic.
Aaron Greenberg, a group product manager for Xbox 360, said in an interview Monday that the ads were real.
Greenberg also said competitors' prices had no impact on Microsoft's decision.
"In fact, we had this in our plans from the very beginning," he said, and added that the timing was linked to the release of several highly anticipated video games, including "Madden NFL 08," which hits retail shelves next Tuesday.
"There is nothing too shocking about this," said Michael Gartenberg, an analyst at JupiterResearch. He said it's normal for companies to cut console prices between one and two years after launch.
The analyst added that the $50 price cut will bring in a whole new group of customers who ruled it out at the higher price, and that Microsoft should enjoy increased sales immediately — even though the official holiday shopping season is still months away.
Microsoft also said Tuesday that the green and gold "Halo 3"-themed console, will go on sale in September for $400.