Industry executives say the software giant is preparing a console to take on Sony's Playstation as the most popular video gaming device.

The Microsoft console - code-named X-Box, is expected to be launched late next year, coinciding with the release of the new Sony Playstation 2.

With the increasing convergence of technology, games consoles are moving closer to providing direct competition to PCs and other forms of home entertainment, with internet access and the ability to play digital video.

Earlier this month, Sega introduced its Dreamcast console in the UK. The device includes internet capability as well as traditional game playing.

The new Sony machine will be able to run high-quality three-dimensional animation, play digital video disks, connect to the internet and store data in hard disk drives, offering competition to home personal computers which use Microsoft software.

Executives at software makers and PC manufacturers said they have been briefed by Microsoft on the X-Box.

Rick Doherty, an analyst at consultants Envisioneering, said: "Microsoft needs to make a statement to keep the game developers and PC consumers loyal.

"Everyone can see there are 60 million Playstations out there and 20 games apiece that go with them.

"Sony has proven that the video game business model works tremendously".

Microsoft's console is expected to play standard PC games with movie-quality animations.