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Microsoft threw down the gauntlet in the video game hardware war Wednesday night, announcing major price cuts in Canada and the U.S. for all models of its Xbox 360 game console.

The cost of the Xbox 360 Arcade edition fell nearly 30 per cent from $279.99 to $199.99, making it by far the least expensive current generation gaming machine on the market. It's now $80 cheaper than Nintendo's $279.99 Wii and just half the price of the most affordable version of Sony's PlayStation 3, which sells for $399.99.

The price of the most popular version of Microsoft's game system, which features a 60 GB hard drive, fell $50 to $299.99. The 120 GB, HDMI-enabled Xbox 360 Elite-the most deluxe version of the console-also saw a $50 price cut, bringing its suggested retail price to $399.99.

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This is an aggressive tactic for Microsoft, which has sold just over 20 million Xbox 360 consoles worldwide and is currently sitting in second place in this generation's hardware race. The Redmond-based company lost its leadership position last fall to Nintendo, which has now sold more than 31 million Wiis and has yet to drop the price of its popular game system.

Meanwhile, Sony's PlayStation 3 has been riding a wave of strong overseas sales, recently hitting the 15 million mark. It's been slowly gaining ground on Microsoft's machine over the last year.

The price cuts come just weeks before the industry's annual fall rush begins. Microsoft seems to be betting that a sub-$200 machine combined with high profile holiday titles such as Gears of War 2 and Fable 2 might be all that's necessary to convince holdout gamers to finally jump into the current generation of consoles.

In a statement announcing the price cuts, Microsoft noted that historically more than 75 per cent of all console sales occur when hardware prices fall below the $200 mark. If the formula holds true for this generation of consoles, the Xbox 360 on track to sell some 80 million machines-more than three times the total number of original Xboxes sold.

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