Milpitas (CA) - Chartered Semiconductor announced that it has reached an agreement with Microsoft to manufacture the next generation CPU for the Xbox 360.

The 65 nm processor is scheduled to enter mass production in the first quarter of 2007 - which provides Microsoft enough time to equip its game console with a more powerful and less power-hungry processor during the 2007 calendar year.

Technical specifications of the new chip have not been announced; however, Chartered said that the 65 nm shrink will also be based on silicon-on-insulator (SOI) technology. The current 90 nm version uses an IBM-designed PowerPC foundation with three cores and a total of 165 million transistors. Clocked at 3.2 GHz, the CPU is capable of cranking out a floating point performance of 115.2 GFlops. The chip is currently mass produced by IBM in East Fishkill, New York, and by Chartered in Singapore.

"We look forward to working with Chartered on the production of such an important component of our Xbox 360 system," said Larry Yang, General Manager of Xbox console development at Microsoft in a prepared statement. "We plan to continue with our strategy of dual sourcing from Chartered and IBM's fabs, which are operationally aligned and compatible, to give us the consistent product quality and flexibility we will need."

The decision to switch the Xbox 360's processor for an enhanced, most likely more powerful and less power-hungry version may be seen as a sign of increasing competitive pressure the console may receive from Sony's upcoming Playstation 3. The original Xbox did not receive such an update during its 45-month life span: The first and the last console integrated a 733 MHz Pentium III processor based on Intel's 180 nm "Coppermine" core.