Xbox 360 manufacturer Microsoft is hard at work developing a new version of its next-generation games console, according to a report by Mercury News.

Codenamed "Falcon", the new machine will feature smaller microprocessors and graphics chips than the Xbox 360 resulting in lower production costs.

The updated console will also feature an increase in reliability as Microsoft is keen to iron out the problems that has plagued the current Xbox 360.

"We have a bunch of different projects that cost reduce and improve quality as you find issues, as does our competition,” said Peter Moore, head of games at Microsoft. "Once you get millions in the field, you learn about the box under all kinds of different circumstances, you can adjust and tweak what you do accordingly."

The Xbox 360 "Falcon" is expected to be released this autumn.