Updated from 6:30 a.m. EDT

SAN FRANCISCO -- Microsoft ( MSFT) has plenty of reasons to celebrate this month. The company's blockbuster game, Halo 3, topped the September game charts, and sales of its Xbox 360 console came out on top for the first time among the latest generation of hardware consoles.

Up to now, analysts have been betting that over the next 12 months Nintendo's Wii would continue to hold the top spot in the latest-generation console market, with Sony's ( SNE) PlayStation 3 and the earlier-released Xbox 360 in a dead heat for second place. Currently, the Xbox 360 has outsold the PS3.

But industry observers said the latest results indicate that the Xbox 360 console could move ahead of both rivals in the next few months.

The best-selling Halo 3 has shown that it can drive hardware sales and that there is room for another price cut in the console, analysts say. And with more big titles coming during this holiday season and early next year, Xbox 360 console could move ahead of Sony's PS3 in the next few months and even overpower the Wii in the long run.

"This is really Microsoft's holiday season," says Billy Pidgeon, an analyst for research firm IDC. "They have some really great software out there for the console and more coming, a great installed base, high attach ratios (the number of games sold for each console) and great spending online."

The strength of the Xbox 360, which was released in November 2005, was demonstrated in last week's monthly game sales data from The NPD Group, a research firm. Microsoft's biggest release of the year, Halo 3, sold 3.2 million copies in just 12 days after its release. More importantly, Halo 3 helped move game consoles as Xbox 360 sales nearly doubled in September from the previous month.

The simExchange, a fantasy stock market that allows gamers to predict video game sales, expects 10.6 million copies of Halo 3 to be sold over its lifetime.

"Halo is a big game now and will be for months," says David Dennis, a spokesperson for Microsoft's games and entertainment devices division. "When people go out to buy a console this holiday season, they are still going to think about Halo 3 and the console for it."

Microsoft's games releases for the Xbox 360 does not end with Halo 3. The year's best titles including Activision's ( ATVI) Call of Duty 4, Guitar Hero 3, and Electronic Arts' ( ERTS) Rock Band will launch on the Xbox 360, in addition to the older PlayStation 2 and PS3.

Microsoft has also managed to secure exclusive episodic content around Take-Two's ( TTWO) much-anticipated game, Grand Theft Auto IV, scheduled for release next year.

Sony has responded to the increased competition last week by cutting the price on its 80GB model of its PS3 console by $100 to $499 and introducing a lower priced 40GB version for $399. The Xbox 360 ranges from $277.99 to $449.99, depending on the model.

Despite a price cut for the Xbox 360 in August, the first since the console was launched, Microsoft still has enough room to make another one, said Matt Rosoff, an analyst with Directions on Microsoft, an independent research firm.

"Microsoft is pretty happy with where they are since they are getting close to their goal of breaking even on the hardware," said Rosoff. "And going forward, I don't know if Sony's hardware costs are going to come down as quickly as Microsoft."

Meanwhile, Nintendo's Wii has topped sales charts since its release but gamers are buying few games for the console. Some of the upcoming season's most awaited games including Rock Band and Call of Duty 4 will not be released for the Wii.

"The Wii does not offer the same kind of advanced technology for fast action games or graphic intensive game that the PS3 or the Xbox 360 does," said Rosoff.

Experts said that though the Wii currently enjoys higher sales, sales of the console may eventually languish as gamers opt for hardware that can actually help them play games the best.

Todd Greenwald, an analyst with Nollenberger Capital, said in a recent report that independent publishers are gravitating to the Xbox 360 and PS3. "In September, Halo 3 helped drive a significant acceleration in the Xbox 360 base, which should help publishers like EA, Activision and Take-Two this holiday season," he said. Nollenberger does not own shares or have an investment-banking relationship with Microsoft.

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