Rumours were circulating today that Microsoft is set to dump HD DVD and bring out a Blu ray Xbox 360 by as early as May 2008. The move will allow the Company to go head to head with the Sony PS3 gaming console which has been credited with being one of the main reasons that retailers have preferred Blu-ray over Toshiba’s HD DVD.

Insiders at Microsoft in the USA have told SmartHouse that Microsoft has already configured a standalone Blu-ray player that can be connected into an Xbox 360 and that subject to internal marketing and sales approvals the model could be on sale within 3 months.

The Company has also been working on a built in Blu-ray player however insiders are claiming that Microsoft see the HD format battle moving online with consumers offered 1080p movie and content files as a download as opposed to having to buy a HD DVD or Blu-ray disc.

Both Intel and Microsoft have been supporters of the HD DVD format that is set to be killed off this week.

The Company has also held discussions with several OEM manufacturers of media centres with nearly all of them telling the software Company that they are set to move to Blu-ray configured Media Centres within the next month.

Late last week US Media Centre maker Niveus dumped HD DVD in favour of Blu-ray.

The Company VP of marketing Brian Paper said that Niveus had received support from Microsoft and Intel when implementing HD DVD. The format wasn't pushed on Niveus, he said, adding that the commitment in both Intel and Microsoft "isn't religious for HD DVD".

Michael Ephraim the Managing Director of Sony Computer Entertainment said: "We would welcome Microsoft to the Blu-ray stable. In fact it is quite logical for them as the PS3 has been very succesful in driving consumers to Blu-ray. In fact we believe that it has done more to win the format war than traditional Blu-ray player".

When asked whether Sony would grant Microsoft a Blu-ray licence he said: "That is up to Sony Corporate but I see no reason why they would not do it".

During CES 2006 the then Microsoft's Xbox corporate VP of worldwide marketing and publishing Peter Moore told Japanese site ITmedia that a Blu-ray Xbox 360 peripheral could appear for the system if the need arises. Moore admitted that Microsoft isn't sure of the next-generation format war's outcome, with the worst-case scenario being a repeat of the Beta vs. VHS war of the '80s.

However, he suggested that whatever the outcome of the HD-DVD/Blu-ray war, the Xbox 360 can adopt the dominant format since its uses an external drive.