Microsoft's next generation console, the Xbox 360, will cost $299 (£209) when it goes on sale at Christmas.
Microsoft's Xbox 360 will be in the shops by Christmas
The company announced the price at the German Games Convention in Leipzig.
A more expensive version costing $399 (£279) will include a 20GB hard drive, wireless controller, headset and remote control.
Microsoft is aiming to launch the Xbox 360 before Sony's PlayStation 3, which is due out in the spring.
Nintendo's next generation console, the Revolution, is also expected to be released in 2006.
Race to be first
The pricing for the Britain, Europe and the US was announced by Microsoft's head of home and entertainment in Europe, Chris Lewis.
The basic Xbox 360, dubbed the Core System, will retail for $299 in the US, 299 euros in Europe and £209 in the UK.
The fully loaded console with all the accessories will sell for $399, 399 euros and £279.
Games for the new wave of consoles promise realistic graphics
The pricing for the key games market of Japan is set to be announced at the Tokyo games fair next month.
"With both the Xbox 360 and the Xbox 360 Core System, we're offering consumers real choice and real value," said Peter Moore, Xbox marketing chief at Microsoft.
Microsoft has yet to give an exact date for the launch of the 360 but it is expected to be out sometime before Christmas.
The software giant is racing to be the first out of the gate with its new machine.
Microsoft is looking to take an early lead in the battle to dominate the next generation of consoles.
It was a year behind Sony's PlayStation 2 in launching the original Xbox and it never managed to make up the time in sales.