SAN FRANCISCO -- Microsoft ( MSFT) shaved $50 off the price of the Xbox 360 in a move to spur sales of its two-year old video game console.

With cutthroat competition among console makers, Microsoft needs to entice potential customers as its rivals move aggressively to stay ahead.

Sony ( SNE) dropped the price of its 60-gigabyte PlayStation 3 model last month by $100 to $499, and Nintendo ( NTDOY) plans to introduce new games to keep up consumer interest in the Wii.

Microsoft's price cut on the Xbox 360, beginning Wednesday, as well as a slew of game releases in the next few months for the console, including Electronic Arts' ( ERTS) hit football title, Madden NFL 08, Halo 3 and Activision's ( ATVI) Guitar Hero III, should keep gamers interested.

Microsoft said the Xbox 360 -- with a 20GB hard drive, wireless controller and headset -- will now sell for $349.99. The Xbox 360 Core System has been priced $20 lower at $279.99 and the Xbox 360 Elite, with a 120-GB hard drive, will be sold at $449.99 -- a discount of $30.

Sales of Xbox 360 could jump up by as much as 35% to 50% estimates Michael Pachter, an analyst with Wedbush Morgan, which does not own shares or have an investment banking relationship with Microsoft.

Shares of Microsoft were down 20 cents, or 0.6% to $29.34 in recent trading.

In order to keep console sales strong headed into the holiday season, Microsoft had no choice but to drop the price, says Matt Rosoff, an analyst with independent Microsoft-focused research firm, Directions on Microsoft.

Microsoft sold fewer consoles than expected in its last fiscal year, shipping 11.6 million systems at the end of June 30, instead of its scaled down expectations of 12 million consoles. At the beginning of the fiscal year, Microsoft had said it could sell as many as 13 million to 15 million systems.

"This is a crucial season for Microsoft. If you look at sales of Xbox 360 since the PS3 and Wii there has been a definite slowdown," says Rosoff. "But now that the core system is priced fairly close to the Wii, and the console has the strongest lineup of games." The Wii retails for $249.99.

Sony sold 98,469 PS3s in June , up 21% from May, said research firm NPD. Nintendo sold 381,800 Wiis, while Microsoft sold 198,400 Xbox 360s during the month. And since the new $499 price for the PS3 was announced, sales have increased more than 135% at the company's top five retailers, Sony said.

Microsoft's latest discounting effort did lose the element of surprise, however.

Online gamer forums have been buzzing for more than a week after leaked newspaper ads that touted the price cut for retailers including Wal-Mart ( WMT) and a Circuit City ( CC).

Sony's recent price cut also takes a little wind out of Microsoft's announcement, says Pachter. "Now that the PS3 is $100 cheaper, a $20-to-$50 cut on the Xbox 360 may have a lesser impact than it would have in a vacuum," he says.

Microsoft is also fighting the perception by consumers that they could be buying a flawed device. In June, the company said it will take a pretax charge of up to $1.15 billion to extend its one-year warranty to three years to cover a hardware problem.

But the company never explained exactly what went wrong with the faulty consoles.

"Since Microsoft never quite explained the design flaw, it is not clear to consumers whether they are buying a box built before the design flaw was fixed," says Pachter. "That could dampen the amount of increase in demand."

Meanwhile, the price cut is unlikely to affect the profitability of the company's entertainment devices division, say analysts. "With this price cut, I think it is a combination of production efficiencies and the need to stay ahead of competitors," says Brian O'Rourke, senior analyst with research firm In-Stat.