Microsoft has also promised to reimburse customers who already have had to pay out of pocket for repairs or replacement machines by taking a charge of more than $1 billion.

Microsoft is promising to repair or replace any Xbox 360 that dies within three years of purchase and will pay the shipping charges to boot. Previously, the company offered a one-year warranty.

In a conference call, Microsoft entertainment and devices division president Robbie Bach said, "We‘re not doing a good enough job in one area of business that we deeply care about. We‘re taking responsibility to make sure every Xbox 360 owner has a great gaming experience."

"The majority of Xbox 360 owners are having a great experience with their console and have from day one. But this problem has caused frustration for some of our customers and for that we sincerely apologise," he said.

Microsoft will expand its global Xbox 360 warranty to cover for the problem —identified by an error message of three flashing lights error message —to three years from the date of purchase to cover for the problem. Previously, it had insisted that the failure rates for the system were within an acceptable level.

The apology comes in at a time when the company is in a heated battle with Nintendo Wii and Sony Playstation 3 in the latest round of the game-console wars.

Although the Xbox 360 is the leading console in terms of units sold, Nintendo‘s Wii has been quickly closing the gap, far outselling the Xbox 360 in the United States and in Japan in recent months.

Microsoft officials declined to say how many machines had been returned or had been affected by the problems.