Since its launch, some Xbox 360 owners have reported an overheating problem called 'red ring of death' where the console freezes permanently and a crimson circle appears around the 'on' switch.
The new hardware, codenamed Jasper, is the latest 65-nanometer version of the AMD graphics chip, which Microsoft is claiming will alleviate the overheating issues.
Dean Takahashi, author of technical books on the Xbox 360's problems, wrote on Venture Beat that the new chip offers Microsoft the chance to "rise above the problems".
"The graphics chip will likely consume less power than previous versions, allowing it to fit snugly into its motherboard socket," he said. "That should lead to fewer system failures due to the graphics chips coming loose."
Jasper also features 256MB of Flash memory storage compared to the 16MB offered by the previous hardware.